Inflation in the UK reaches a 10-year high, which bolsters rate hike bets

As household energy bills rise, British inflation has risen to a 10-year high. This bolsters expectations that the Bank of England will increase interest rates in December. It did so just weeks after it reacted to market turmoil by keeping borrowing costs low.

The Office for National Statistics reported Wednesday that consumer prices increased by 4.2% in October, a leap from the 3.1% increase in September.

Yael Selfin (chief economist at KPMG UK) stated that “Today’s inflation data will strengthen the Bank of England’s resolve to act.”

The pound briefly rose to one week high versus the U.S. Dollar and a 21-month high compared to the euro.

Rishi Sunak, Finance Minister, said that rising inflation is not a British problem. The government was taking steps to offset the impact on spending power even though it reduces most of its coronavirus assistance support.

The UK’s inflation rate is in the middle of G7 countries. Annual U.S. consumer price inflation is now at 6%.

After the lifting of the regulatory cap on bills last month the largest driver of inflation was the household energy bills. Gas prices paid by consumers increased 28.1% in the past year.

British energy suppliers are struggling with rising wholesale gas prices, which have caused the collapse of several energy companies. More than 2 million customers have had to switch providers since then, often at higher tariffs.

However, prices rose all across the board with the largest drivers of inflation acceleration being second-hand vehicles.

BoE, which has a goal of 2% inflation, has stated that higher borrowing costs cannot have an impact on energy prices. Some of its policymakers worry that high inflation may damage its credibility with the public.

According to the BoE, inflation is expected to rise by around 5% over the next few months and then fall back.

The BoE appears poised to be the first major central bank to raise rates since the outbreak of coronavirus in the global economy. Economists and investors are increasingly anticipating that this will occur on December 16.

Andrew Bailey, BoE Governor, stated Monday that he was “very concerned” about inflation and that he had voted to keep rates at their current level earlier in the month.

Futures markets are now pricing in a 15-basis-point rate increase in December and show roughly two-thirds of a 25-basis-point hike in February. This would bring the Bank Rate to 0.5%, up from 0.1% at its current low.

Data on Tuesday indicated that Britain’s labour market had reacted to the government’s end of its job-protecting furlough scheme. This was a crucial factor in the BoE’s decision on rates.

Robert Alster, chief investor officer at wealth manager Close Brothers Asset Management cautioned against the assumption that a BoE rate increase next month is a done deal.

He said that “Ultimately, the effect of rising inflation on consumer expenditure and confidence will be an important measure of stability and determine how hawkish Bank needs to become.” “We could see the rate increase kick in 2022.”

M&G Investments portfolio manager Ben Lord said that tax increases and less pandemic-related emergency spending by the government in early 2022 combined with the ending of the BoE’s bond-buying stimulation programme posed risks to Britain’s economy.

On Wednesday, data showed signs of inflation pressure. The factory prices rose more than anticipated, by 8%, compared to October 2020. This is the largest increase in prices since 2011.

According to the ONS, manufacturers’ input costs rose by 13% in 2008, which is the highest level since 2008.

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