UK inflation rate breaks 3-month stretch of declines with surprise surge to 10.4%

UK inflation jumped unexpectedly in February as food and energy bills continued to rise, adding pressure to households.

The Consumer Price Index (CPI) rose at an annual rate of 10.4%, above the consensus forecast of 9.9% among economists in a Refinitiv poll and up from 10.1% in January. On a monthly basis, CPI inflation came in at 1.1%, beating expectations of 0.6%.

“The largest upward contributions to the monthly change in both CPIH and CPI rates came from restaurants and cafes, food and clothing, which was partially offset by downward contributions from leisure and cultural goods and services (particularly recording media) and motor fuels,” said the UK Office for National Statistics.

The consumer price index including housing costs for landlord occupants (CPIH) rose 9.2% in the 12 months through February 2023, up from 8.8% in January.

The surprise increase in February marked a break from three consecutive months of slowing price increases since the 41-year high of 11.1% reached in October.

British households continue to deal with rising food and energy bills, while workers across a range of sectors have launched mass strikes in recent months amid disagreements over pay and conditions.

The British pound rose 0.4% against the dollar early on Wednesday.

Bank of England ‘on a knife edge’

The edition will be an additional irritant for the Bank of England, which has aggressively raised interest rates in a bid to rein in inflation and will announce its final monetary policy decision on Thursday.

The downward path to inflation will not be smooth, said Richard Carter, head of fixed interest research at Quilter Cheviot, and suggested that the Bank of England may have to continue to raise the bank rate beyond its current level of 4%.

“The BoE’s rhetoric will continue to be that inflation is the main concern, however, events in the banking sector have taken over somewhat and the MPC has seen significant divisions on the best way forward,” he said.

The fallout from the Silicon Valley bank failure and the emergency bailout of Credit Suisse have added another layer of complexity to the task facing central bankers around the world.

Last week, the Independent Office for Budget Responsibility forecast UK inflation to fall to 2.9% by the end of 2023 – a forecast Carter said was “increasingly ambitious” in light of Wednesday’s print.

“To what extent the banking crisis will change this prediction remains to be seen, but it seems like a very strong estimate,” he said.

Jake Finney, an economist at PricewaterhouseCoopers, said the reading was the first setback in the Bank of England’s mission since inflation began falling in November, and highlighted that inflationary pressures were beginning to diverge.

“Food price inflation continues to reach new heights, and the prices of restaurants and cafes have increased further, while transportation price inflation continued its downward trajectory with the continued decline in gasoline and diesel prices,” he said.

Despite the bump in the road, PricewaterhouseCoopers still sees inflation declining throughout most of 2023 to move closer to the bank’s 2% target. However, Feeney noted that “the pressure of living standards is far from over”.

The OBR expects real household disposable income per capita, a measure of living standards, to decline by a cumulative 5.7% in 2022/23 and 2023/24.

“The Bank of England’s decision on Thursday remains on edge. The latest inflation data is a setback, but the BoE has made it clear that it will not be affected by monthly changes in data points,” Finney said.

“We expect to see a final 25 basis point rally from the BoE. However, further volatility in financial markets could shift sentiment towards the no change decision.”