UK inflation has risen to its highest level in ten years, fuelling talk of an imminent interest rate hike.
The Consumer Prices Index (CPI) rose by 4.2% in the 12 months to October 2021, up from 3.1% in September, according to figures from the Office for National Statistics.
It marks the highest 12-month inflation rate since November 2011, when inflation hit 4.1%.
Household energy bills were the biggest driver behind the rise in inflation, following the increase in the cap on energy prices at the start of October. The Office of Gas and Electricity Markets introduced energy price caps to limit the price energy suppliers can charge the estimated 15 million households that use a prepayment meter.
It meant that 12 month inflation rates for electricity and gas reached 18.8% and 28.1% respectively, the highest annual rates since 2009. Petrol prices also jumped by 25.4p a litre amid a global rise in oil prices, taking it to its highest level since September 2012.
In November, the Bank of England – which has a target of 2% inflation – chose to keep interest rates at historic lows despite predicting inflation to rise by 5% in early 2022. However, the latest inflation figures have prompted growing expectations of a hike at next month’s Monetary Policy Committee meeting.
Richard Carter, head of fixed interest research at Quilter, said, “we should be braced for a showdown at the next MPC meeting in December, where all bets will be on a rate hike. Particularly given we now have more information on the state of the labour market in the UK, which seems to be transitioning from the end of the furlough scheme well.
“Some may say that the heightened inflation is evidence that the Bank of England should have acted already and started the process of tightening monetary policy. But really what’s causing the heightened price increases in the energy market is a perfect storm of factors that are feeding through at the same time. It’s not clear how a modest 0.15bps rate hike would have any impact on the heightened prices in the electricity and gas market. Normal monetary levers might not be effective.”
Shane O’Neill, head of interest rate trading for Validus Risk Management, said: “This higher-than-expected print will give the Bank of England incentive to increase rates at their next meeting in December. They disappointed markets in November by holding off on a rate hike despite it being fully priced in – citing slowing demand and growth concerns – critics at the time suggested that the Bank was not acting to curb runaway inflation and this print will go some way to validate these critics.
“After yesterday’s strong employment data, the missing piece of the puzzle according to Governor Bailey, there is seemingly little reason to expect the Bank not to hike, though this thinking has scuppered traders before. If the first post-furlough employment data point, released shortly before the Bank’s December meeting, confirms the strength of the employment market and inflation, as seen today, continues higher – it is going to look more and more like the Bank missed an opportunity in November.”
Dan Boardman-Weston, CIO at BRI Wealth Management, echoed the sentiment but expects inflation to ease by Spring next year.
“The level of inflation is going to keep getting worse over the coming months as supply stays stretched, demand stays robust and base effects technically push the rate of inflation higher. This is undoubtedly going to put pressure on the Bank of England to raise rates, which we suspect they will have to do in the next few months given the high levels of inflation and robust labour market.
“Nothing we see leads us to believe that this inflation is permanent and as we start heading into Spring next year the figures will start falling rapidly. The Bank of England needs to be careful that they’re not too hasty in tightening monetary policy as a policy misstep could do more harm to the economy than this transitory inflation we are witnessing.”
Danni Hewson, financial analyst at AJ Bell, believes the Bank of England has a delicate balancing act between helping consumers and undermining economic recovery.
“ The Bank’s governor Andrew Bailey has admitted he’s worried by the figures and had given serious thought to hiking rates earlier this month. The question is what good would it do. Very little in the immediate aftermath seems to be the answer, especially as a rate rise wouldn’t solve the global chip shortage, geo-political tensions or shortages of crucial supplies like gas.
But a rate rise will send a signal, it might give employers a slight pause before they plump for the cheque book to solve their recruitment issues. Yesterday’s jobs figures coupled with today’s inflation numbers could be a recipe for stagflation, a situation no government, no country wants to experience.
“Adding 0.25% to the mix might stop it over proving without affecting the overall bake. The Bank doesn’t want to act too soon, to undermine recovery, or to act if its move will only add to the pain for cash strapped consumers, but it will now be under increased scrutiny.”
Investment experts also warned of the effect of higher inflation on consumer spending and saving habits.
Andrew Tully, technical director at Canada Life, said it could risk leaving pension savers deprioritising their pension as wages are made to stretch further to cover rising costs.
“If inflation continues to grow unchecked we could start to see the undoing of some of the great strides forward made by auto-enrolment,” he cautioned.
Meanwhile, research by Wesleyan Group found that almost a fifth (17%) of savers have already changed how they manage their money, with the most popular course of action being to move into or increase investments in the stock market. A further 26% of people intend to make changes in the future, however just over a third (35%) said they have no intention of taking any action to combat rising inflation.
