Britain’s inflation rate hits decade high of 4.2%

Steep increase in prices puts added pressure on Bank of England to raise interest rates

Britain’s inflation rate jumped to 4.2 per cent in annual terms in October – more than double the Bank of England’s target and the highest level seen in a decade.

Inflation has risen sharply since the economy fully reopened, driven by surging consumer demand and supply chain glitches, the Office for National Statistics said, with the October rise a steep increase from the 3.1 per cent of the previous month.

“Many countries are experiencing higher inflation as we recover from Covid and we know people are facing pressures with the cost of living, which is why we are taking action worth more than £4.2bn to help them,” said Rishi Sunak, UK Chancellor of the Exchequer.

The main drivers of higher inflation include increased household energy bills due to the price cap rise, an increase in the cost of second-hand cars and fuel, as well as higher prices in restaurants and hotels, ONS chief economist Grant Fitzner said.

“Costs of goods produced by factories and the price of raw materials have also risen substantially and are now at their highest rates for at least 10 years."

The steep inflation increase will pile added pressure on the Bank of England to raise interest rates, after separate figures showed unemployment continued to fall even after the end of the UK's furlough scheme.

The BoE has said it may have to increase interest rates "in the coming months" to tackle the problem. Governor Andrew Bailey this week said he felt "very uneasy" about the inflation outlook with his vote to hold rates at the last meeting a close call.

Derrick Dunne, chief executive of YOU Asset Management, said today’s figures could increase speculation that the Monetary Policy Committee will increase rates at its December meeting.

But this is looking less likely, after Britain’s economic growth slowed sharply in the third quarter, with gross domestic product growing only 1.3 per cent in a further sign that economic recovery is faltering amid supply chain challenges.

“Just a few days ago, in fact, the bank’s own chief economist publicly acknowledged that acting too soon could ‘derail some of the recovery which in some respects is still quite fragile’," Mr Dunne said.

However, while the BoE has consistently said that this period of high-inflation will pass, growth in employment and wages this week reinforced views that the lender may be forced to make a move to curb an upwards spiral in prices from taking hold.

If the BoE does raise rates, it will become first of the world's big central banks to do so since the coronavirus pandemic swept the global economy.

Business groups sounded a note of caution, highlighting the weaker economic growth and signs of weakness in consumer spending and confidence.

“The Bank of England are facing a tricky trade-off between surging inflation and a stalling recovery,” said Suren Thiru, head of economics at the British Chambers of Commerce. “However, with the UK economy facing mounting headwinds, raising interest rates too early should be resisted.”

The pickup in inflation last month was driven mainly by natural gas and electricity prices after regulator Ofgem allowed suppliers to raise tariffs by as much as 12 per cent to offset rising wholesale costs.

Higher prices for food, motor fuel, used cars and at restaurants and hotels also contributed to the sharp increase while disruption to supply chains boosted prices for a wide variety of goods and services.

“For pensioners and others on limited incomes, this level of inflation is hard to cope with," said Becky O’Connor, head of pensions and savings at interactive investor.

"Careful budgeting only gets you so far. Those already on the cheapest possible deals, the lowest tariffs and buying the cheapest food have very little wriggle room. There’s nowhere left to hide. You will always be spending something on food, energy and fuel if you drive and these are among the categories where prices are rising the fastest."

Updated: November 17th 2021, 9:18 AM
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