ANNUAL UK inflation has soared above five per cent to its highest in more than a decade – likely intensifying the dilemma for interest-rate setters amid uncertainty over the Omicron coronavirus variant’s impact.
The jump in inflation was fuelled partly by a record monthly surge in petrol prices to an all-time high. However, the increase was broadly based.
Annual consumer prices index inflation surged from 4.2% in October to 5.1% last month, data published yesterday by the Office for National Statistics revealed. The latest inflation rate is much greater than the 4.7% figure projected in a poll of economists by Reuters and the highest since September 2011. Inflation is now more than two-and-a-half times the 2% target set for the Bank of England by the Treasury.
As well as motor fuel prices, upward pressure on annual inflation came from electricity and gas bills and from other categories including food and non-alcoholic beverages, clothing and footwear, and alcohol and tobacco.
Danni Hewson, financial analyst at stockbroker AJ Bell, said: “What do you get when you add Covid nerves to hot, hot, hot inflation numbers? It’s a question that’s troubling central banks, investors and consumers alike.”
Referring to last month’s decision by the Monetary Policy Committee to hold UK base rates at a record low of 0.1%, she added: “Last month’s unexpected decision by the Bank of England to stick with the status quo unsettled London markets – investors thought they had [Bank of England Governor] Andrew Bailey’s measure, now they’re wondering if their view of the current situation is accurate.”
Looking ahead to today’s announcement of the MPC’s latest decision on rates, Ms Hewson declared: “A change…would be unexpected, and the one thing markets hate more than a rate rise is one they’ve not priced in.”
The emergence of the Omicron variant in recent weeks was viewed as reducing the chances of a December rate increase. However, opinion was divided yesterday on whether the Bank of England would announce a rise in rates today, with investors putting a much-increased probability of about 60% on an increase to 0.25% in the wake of the inflation figures, according to analysis by Reuters.
Average petrol prices stood at 145.8 pence per litre in November, compared with 112.6p a litre in the same month of last year, the ONS figures show. The November 2021 price is the highest ever recorded, the ONS said.
The average price of petrol rose by 7.2p per litre between October and November, the largest monthly increase since comparable records began in 1990, the ONS added.
Martin Lawrence, director of investments at financial services mutual Wesleyan, said: “Inflation has continued to sail far beyond the Bank of England’s 2% target, with…a tangled supply chain and labour shortages continuing to push it off course.”
And he warned: “We could be heading towards inflationary storm clouds early next year, especially if [regulator] Ofgem raises the energy price cap for consumers in April – meaning household bills could soar.”
Mr Lawrence added: “The Omicron variant has not caused international markets to plunge into troubled waters yet, but the uncertainty surrounding new variants may cause central banks to pause plans to raise interest rates and, coupled with prolonged inflation, this is a perfect storm for savers.”
Ed Monk, associate director at fund manager Fidelity International, said: “The headline CPI rate is now above 5% – a level most believed would not be hit until well into next year. The growth in the rate of price rises since just March has been remarkable and shows no sign of abating. Reports of a record number of manufacturers hiking prices [suggest] the squeeze on households has much further to go.
“The Bank is currently caught between its two primary functions – controlling inflation and ensuring financial stability. With inflation already so far above its 2% target, getting prices under control would appear a pressing priority. The problem is that there is clearly a concern that the economy is too weak to withstand any increase in borrowing costs. Weak GDP growth of just 0.1% [in October] shows how little momentum there is in the economy right now.”