UK inflation overshoot adds to brutal cost of living squeeze

Bloomberg

UK inflation unexpectedly accelerated for a fourth straight month in January, a surprise that highlights a brutal cost-of-living crisis that’s only set to worsen this year.
Annual price growth rises to 5.5 percent, a new 30-year high, driven by clothing and footwear, the Office for National Statistics said on Wednesday. Both economists and the Bank of England had expected inflation to remain unchanged at 5.4%. An index that excludes volatile items quickened to a record 4.4%.
The figures raise the stakes for the BOE, with investors not ruling out a 50 basis-point interest-rate increase in March, an unprecedented move since it gained independence in 1997.
The highest inflation in 30 years is creating a cost of living crisis in the UK.
The central bank is predicting inflation will peak at around 7.25% in April — more than triple its target — when a 54% surge in energy bills is due to take effect at the same as taxes go up. By contrast, wages are increasing at less than 4%.
Inflation, which has surged from just 0.4% a year ago, has overshot forecasts in seven out of the past nine months. In response, current market pricing suggests interest rates will increase to 2% this year from 0.5% — the highest since before the global financial crisis.
Yael Selfin, chief economist at KPMG UK, said she expected inflation to “hit households hard” as the impact of the increase in energy tariffs takes effect.
“The Bank of England has signalled a determination to get ahead of the curve on inflation. In the short run, this will add to the squeeze on incomes as lenders pass on the rate increase to borrowers,” she said.
The pound gained after the data, climbing 0.1% at $1.3553 as of 07:56 a.m. in London. Government bonds fall, with the yield on the UK’s 10-year securities rising 2 basis points to 1.599%.
Clothing and footwear prices fell less sharply than they did in January 2021 when the country was in lockdown. Retailers traditionally cut prices in January, and the 2.9% fall this year was the smallest since records began in 2005. Furniture and households goods also contributed to the pickup in inflation.
Downward pressure on inflation came from restaurants, hotels and transport, with auto fuel prices falling on the month, the ONS said. Overall, consumer prices fell 0.1% on the month, the smallest decline for any January since 2011.
Retail price inflation, which determines the payments on index-linked government bonds among other things,
accelerated to 7.8%, the most since early 1991.
“We understand the pressures people are facing with the cost of living,” Chancellor of the Exchequer Rishi Sunak said in a statement. He noted how the government was responding by providing millions of households with up to 350 pounds each to help with rising energy bills.
Separate figures showed pipeline cost pressures continuing to build in January. Fuel and raw material costs rose 0.9% following a steep rise in oil prices due to the risk of conflict between Russia and Ukraine. In response, producers raised their own prices by 1.2%, four times the increase in December.