UK inflation unexpectedly accelerated in February, raising expectations that the Bank of England will raise interest rates again at its meeting on Thursday.
The annual rate of consumer price inflation rose to 10.4 percent in February, the National Statistics Office said Wednesday. That’s up from 10.1 percent in January and higher than the 9.9 percent forecast by the BoE and economists polled by Reuters.
Compared to the previous month, prices were up 1.1 percent, almost double the 0.6 percent increase forecast by analysts.
After the unexpected rise in inflation, investors are betting that the BoE will raise interest rates by 0.25 percentage points this week, with little chance of a bigger half-point increase. Ahead of the data, the market was evenly divided between forecasts of a quarter-point increase and no change in borrowing costs on Thursday.
The pound rose 0.5 percent against the dollar after the inflation report, trading at $1,227. Sterling has risen 1.9 percent this month. Against the euro, the British currency rose 0.5 percent to trade at €1,139. It has risen 0.8 percent this year against the single currency.
ONS chief economist Grant Fitzner said inflation was “checked in February mainly driven by higher alcohol prices in pubs and restaurants” after a discount in January.
Food and non-alcoholic beverage prices rose 18.2 percent, the highest level in more than 45 years. The ONS reported an increase in some salads and vegetables as high energy costs and bad weather across Europe led to shortages and rationing.
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Core inflation, which strips out the volatile prices of food, energy, alcohol and cigarettes, also rose sharply to 6.2 percent in February, from 5.8 percent in the previous month. That exceeded economists’ expectations of a slowdown to 5.7 percent.
Kitty Ussher, chief economist at the Institute of Directors, said the febrile environment in the banking sector has led to suggestions that the central bank should pause before raising rates further. “Today’s data shows the opposite; The Bank of England’s job is not done,” he added.
Food price inflation affects the poorest households as they account for a larger proportion of spending.
Reacting to the latest figures, shadow Chancellor Rachel Reeves said that after 13 years of Conservative government, many families were now “feeling worse off” economically.
“The cost of living crisis is still very difficult, and taxes are rising, but the government chose to use the Budget to give a £1bn bung to the top 1 per cent,” he said.
Joanna Elson, chief executive of the Money Advice Trust, the charity that runs Debtline and Business Debtline, said the latest inflation figures “show that the relentless pressure on household budgets will continue with no sign of easing”.
Services inflation, closely watched by policymakers as a better gauge of domestic price pressures, rose to 6.6 percent in February, from 6 percent in the previous month and near a three-decade high of 6.8 percent in December.
Prices at restaurants and hotels rose at an annual rate of 12.1 percent in February, up from 10.8 percent in January, and the highest rate since data began in 1991.
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UK inflation is still five times higher than the BoE’s price stability target of 2 percent. It is also higher than in all other G7 countries. In the US, annual inflation fell to 6 percent in February from a peak of 9.1 percent, and fell to 8.5 percent from a peak of 10.6 percent in the euro zone.
Chancellor Jeremy Hunt said: “Falling inflation is inevitable, so we must stick to our plan to halve it this year.”