UK inflation has jumped to its highest level in almost a decade, increasing pressure on the Bank of England to raise interest rates and pushing up sterling.
The annual rate of the consumer price index rose to 4.2 per cent last month, up from 3.1 per cent in September and the fastest pace since November 2011, according to figures from the Office for National Statistics.
Inflation rose to more than double the 2 per cent BoE target and was higher than the 3.9 per cent forecast by economists polled by Reuters.
Sterling rose against the euro to its strongest level since February 2020, adding 0.4 per cent to €1.19 on Wednesday morning.
Yael Selfin, chief economist at KPMG UK, said “confirmation that inflation is moving further away from its 2 per cent target may seal the Bank of England’s resolve to raise rates in December, following the strong labour data released this week”.
ONS chief economist Grant Fitzner said inflation climbed steeply in October, driven by higher household energy bills. The costs of electricity, gas and other fuels rose 23 per cent in October.
Inflation was also propelled by a rise in the cost of second-hand cars and fuel, both up by more than 20 per cent, reflecting supply disruptions in the automotive sector and strong demand from people seeking an alternative to public transport due to the risk of Covid-19.
The restaurant and hotel sector also contributed to higher inflation with prices in accommodation services rising 13 per cent, partially reflecting the rise in the VAT rate for hospitality, leisure and tourism businesses.
Core inflation, which excludes more volatile energy and food, rose more than expected to 3.4 per cent, from 2.9 per cent in September, suggesting that the upward price pressure was broad-based.
The BoE expects consumer prices to rise to 4.5 per cent in November and to peak at about 5 per cent in April.
Kitty Ussher, chief economist at the Institute of Directors, said “at this point in time firms are far more worried about underlying inflation than the rising cost of debt”.
“With interest rates at historic lows, we’re calling on the Bank of England to show it means business and get inflation expectations back in line with their mandate,” she added.
However, Jack Leslie, senior economist at the think-tank Resolution Foundation, argued that “while painful for households, the fact is that the global nature of these inflationary pressures mean that traditional tools such as raising interest rates are likely to have little effect”. He noted that inflation was up from only 0.7 per cent in October last year, marking the largest 12-month increase since at least 1989 when comparable records began.
The cost of goods produced by factories and the price of raw materials have also risen substantially, with the annual rate of producer input prices jumping to 13 per cent in October, from 11.4 per cent in the previous month and the highest for at least 10 years.
The UK is not the only country where household incomes are increasingly eroded by rising prices. Last week, the US reported that consumer prices in October rose at the fastest pace in three decades. Final data released on Wednesday confirmed that eurozone inflation last month rose at the fastest pace in 13 years.
“Many countries are experiencing higher inflation as we recover from Covid, and we know people are facing pressures with the cost of living,” said UK chancellor Rishi Sunak.
Source: Economy - ft.com
