Inflation in the United Kingdom has unexpectedly risen to 10.4 percent in February, its highest level since 1977. This increase has been attributed to higher food prices and pricier drinks in restaurants, according to official data released on Wednesday. The Bank of England (BoE) is due to announce its latest interest rate decision on Thursday, with investors divided on whether it will pause its run of increases in borrowing costs due to recent upheavals in the global banking sector. Richard Carter, head of fixed interest research at Quilter Cheviot, stated that “Given the market movements of late, this puts the Bank of England in an incredibly difficult position as it may not be enough for the Bank of England to press pause on the rate hikes”.
Interest rate futures showed a 100 percent chance that the BoE would raise rates by at least a quarter point, up from just over 50 percent late on Tuesday. The sterling rose against the dollar and the euro after the data was published. “Food and non-alcoholic drink prices rose to their highest rate in over 45 years with particular increases for some salad and vegetable items as high energy costs and bad weather across parts of Europe led to shortages and rationing,” said ONS chief economist Grant Fitzner. Higher alcoholic drink prices added 0.17 percentage points to the annual rate of inflation in February, while the increased cost of food and non-alcoholic beverages added 0.15 percentage points. Overall inflation for food and non-alcoholic drinks rose to 18.0 percent, its highest since 1977.
The Core Consumer Price Index (CPI), which excludes energy, food, alcohol and tobacco and is closely watched by the BoE, rose to 6.2 percent from 5.8 percent in January, versus a forecast decline to 5.7 percent. The annual inflation rate in the services sector, which most policymakers consider a good measure of underlying price pressures in the economy, rose to 6.6 percent after standing at 6.0 percent in January. The increase in inflation in Britain contrasted with a fall in the US CPI rate to 6 percent in the 12 months to February. Eurozone inflation also eased last month, but underlying price growth accelerated.
Finance minister Jeremy Hunt said the data showed that the expected decline in inflation could not be taken for granted. “Falling inflation isn’t inevitable, so we need to stick to our plan to halve it this year,” Hunt said in a statement. On Tuesday, he told MPs that inflation above 10 percent was “dangerously high”. There were some signs of decreasing price pressures ahead. Prices paid by factories increased by 12.7 percent over the 12 months to February, still a big rise by historical standards but their weakest increase since September 2021.
Overall, the unexpected rise in inflation in the UK has put the BoE in a difficult position as it decides whether or not to raise interest rates for an 11th meeting in a row. With investors split on whether or not this run of increases should be paused due to recent upheavals in the global banking sector, it remains to be seen what decision will be made.