LONDON – Consumer prices in the UK rose last month at the fastest annual rate in almost three decades, strengthening the case for further hikes in the Bank of England’s interest rate as the country’s economy emerges from the Omicron wave .
The Bank of England last month became the first major central bank to tighten monetary policy since the start of the pandemic as the UK grapples with a price hike on supply chain snarls and higher energy prices.
Economists believe growth took a tumble in December as households huddled in response to the new coronavirus strain. But cases are now falling rapidly from a peak earlier this month, and growth is expected to recover quickly as the government prepares to lift additional restrictions aimed at curbing the highly transmissible strain.
The most recent However, inflation data will increase concerns about a fall in the cost of living, which is likely to weigh on consumer spending, and increase the likelihood that the BOE will hike rates again at its next meeting in February.
UK consumer prices rose in December 5.4% from a year earlier, the Office for National Statistics said Wednesday — the largest annual increase since March 1992. Economists polled by the Wall Street Journal had expected prices to rise 5.2% annually. after rising 5.1% in November.
The pickup in inflation was driven by higher prices on a range of items, including groceries and certain goods that are harder to source due to pandemic-related supply chain disruptions. Service sector inflation also continued to rise, driven by higher transport and storage costs, reaching 3.4% in December.
The UK is preparing for inflation to peak in April at around 6% if a cap on energy prices imposed by UK regulators is to be revised. That’s more than triple the BOE target of 2%. A planned tax hike in the same month is likely to further squeeze disposable income.
After that, economists expect inflation to fall as the global economy recovers and supply chain kinks resolve themselves.
The Omicron variant has complicated the calculus for other central banks to balance measures to contain inflation against the risk of derailing the economic recovery.
The Federal Reserve is expected to start raising interest rates soon after the Prices in the US rose 7% in December – the fastest pace in almost four decades – on imbalances between supply and demand, along with stimulus to support the economy.
In the UK, data earlier this week showed that the Economy grew 0.9% faster-than-expected in November, surpassing its pre-pandemic peak before Omicron took hold. Unemployment also fell again, despite the cessation of a job stimulus program in September.
“Today’s numbers combined with strong jobs data suggest a February 3 interest rate hike is virtually locked in,” he said
Chief Economist at Investec Securities and forecasts a 0.25 percentage point rise.
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That would lift the policy rate from a record low of 0.1% to 0.5% before the BOE lifted it to 0.25% in December on stronger labor market strength Borrowing costs justified to contain price growth.
BOE Monetary Policy Committee members will be looking for signs of wage increases affecting prices, which could lead to an inflationary spiral similar to that seen in the 1970s was. As in other developed economies, the UK workforce shrank during the pandemic, creating labor shortages that could give workers the opportunity to negotiate wage increases.
James Smith, developed markets economist at ING, also expected said the BOE would hike rates next month but said it would tighten more slowly beyond that. “As inflation rates fall in 2023 and the prospect of a severe wage-price spiral looks less likely, subsequent moves are likely to be more gradual,” he wrote.