Inflation, Interest Rate & Economic Updates – Forbes Advisor UK

11 May: US Inflation Stays Elevated At Near 40-Year High

US inflation showed a slight deceleration in April, though prices continued to grow close to a 40-year high, according to the latest figures from the US Bureau of Labor Statistics (BLS).

The BLS reported that consumer prices dipped slightly to 8.3% in April, still stubbornly high, but down from the previous month’s figure of 8.5%. Economists had predicted a bigger easing in the inflation rate to 8.1%.

Data showed that prices rose by an extra 0.3% in April, slower than the 1.2% recorded in March. The BLS says the main contributors to the latest inflation figure include shelter, food, airline fares and new vehicles.

Commentators suggest the latest inflation figure will keep up the pressure on the US Federal Reserve, the country’s central bank, to carry on with a programme of half-percentage point interest rate rises through the course of 2022.

The Fed recently increased its interest rates ceiling from 0.5% to 1% and did not rule out similar moves during the remainder of this year. 

In recent weeks, other central banks including the Bank of England, Reserve Bank of India and Reserve Bank of Australia have each increased interest rates in a bid to tackle the inflationary headwinds being felt in many countries worldwide.

The drop in US CPI may be welcomed by markets with investors starting to hope that peak inflation has now passed. 

However, the numbers were still worse than expected and commentators believe it is too early to celebrate with inflation likely to remain high for some time to come, exacerbated by an ongoing crisis in the energy market and the continued conflict in Ukraine.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The pressure is still very much on the Fed to raise interest rates and get inflation under control. Nevertheless, attention is now beginning to turn to a sharp slowdown that is predicted for the global economy, and markets are increasingly becoming concerned by this.”

Dan Boardman-Weston, CEO of BRI Wealth Management, said: “The Fed has a tricky task ahead of it trying to ensure that inflation expectations don’t become entrenched. They are likely to continue tightening policy into a slowing economy. The ‘softish’ landing it is hoping for may not be so soft.”

The next announcement on UK inflation rates is due from the Office for National Statistics on 18 May.

5 May: Bank of England Hikes Interest Rate To 1%

The Bank of England (BoE) today raised its Bank rate of interest from 0.75% to 1%, in a bid to counter the UK’s soaring inflation rate.

UK inflation stands at 7%, and the 25-basis point hike was widely predicted by City forecasters. UK interest rates last stood at 1% in the early part of 2009.  

The move, the BoE’s fourth rate rise since December last year, followed yesterday’s decision by the US Federal Reserve to raise its interest rates ceiling by 50 basis points to 1%.

Today’s announcement by the BoE is the latest in a series of attempts by central banks around the world to tackle the inflationary headwinds being felt in many countries. US inflation stands at 8.5%. Both the BoE and the Fed have inflation targets of 2%.

Earlier this week, the Reserve Bank of India and Reserve Bank of Australia both announced interest rate hikes. The first rise in a decade in the case of the latter.

A rise in the UK bank rate can prove costly to households with either variable rate or tracker mortgages. This is because lenders tend to increase the repayments required on home loans to reflect higher borrowing costs.

In contrast, UK savers will benefit from the rate hike if they have money deposited in variable-rate paying accounts, assuming providers decide to pass on either all, or part, of a rate rise to customers.

Laura Suter, head of personal finance at AJ Bell, said: “Today’s move by BoE rate setters lumps even more pain on households struggling with the cost of living crisis. The global nature of the drivers of inflation means that this increase to 1% is very unlikely to beat inflation into a hasty retreat, but what it is certain to do is pile more misery on people already having to rely on debt just to pay their bills.”

The next Bank rate announcement will be on 16 June.

4 May: US Raises Interest Rates, Bank Of England Decision Imminent 

The United States Federal Reserve has increased its interest rates ceiling from 0.5% to 1% today in a bid to counter the country’s highest inflation rate in 40 years.

Inflation in the US currently stands at 8.5%, and the 50 basis point hike in the Fed’s benchmark rate – the largest change to its main policy rate since 2000 – was widely anticipated by commentators. The increase follows on from a quarter point hike in interest rates announced by the Fed in March.

As part of its two-day policy meeting that concluded today, the Federal Open Market Committee voted to raise the target range of the federal funds rate to between 0.75% and 1%.

In a statement, the Fed said that it expected “ongoing increases in the target range will be appropriate”, paving the way for possible additional half-percentage point rises later this year.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “This 50 basis point hike by the Federal Reserve is likely to be followed by several more, judging by the tone of the statement and the fact that the US economy continues to fire on all cylinders.

“Inflation is running at over 8%, while the latest employment report showed that there are almost two jobs available for every unemployed worker. These pressures won’t be going away anytime soon, and thus the Fed feels the need to act severely and fast.”

Central banks in multiple bids to control inflation

Today’s announcement by the Fed is the latest in a series of attempts by central banks around the world to tackle inflationary headwinds being felt in many countries.

Earlier today, the Reserve Bank of India announced a 40 basis points rise in its benchmark interest rate to 4.4%. On Tuesday this week, the Reserve Bank of Australia surprised economists by hiking its official rate by 25 basis points to 0.35%. The upwards move was the first of its kind in the country for a decade.

Global inflationary pressures are being exacerbated by the war in Ukraine. Inflation has also been driven by factors including soaring energy prices, as well as the reawakening of slumbering global economies post-pandemic.

Both the Fed and the Bank of England, the UK’s central bank equivalent, have inflation targets of 2%. The UK inflation rate currently stands at 7%.

Tomorrow (Thursday), the Bank is widely expected to announce an increase to the UK bank rate. This currently stands at 0.75% having already been subject to three rate rises since December last year.

If confirmed, a rise in the UK bank rate could prove costly to households with variable rate and tracker mortgages as lenders tend to increase repayments to reflect higher borrowing costs.

Savers, in contrast, would benefit from a hike if they have money deposited in variable-rate paying accounts where a provider decided to pass on any rate rise to its customers, in full or in part. 

In the UK, steepling inflation is partly responsible for a cost-of-living crisis that has squeezed the incomes for households that have been left poorer following a raft of tax increases that came into effect in April.

20 April: UK Car Production Plummets By 100k In First Quarter

The number of cars produced in the UK in the first quarter of 2022 fell by 99,211 year on year, from 306,558 to 207,347 – a drop of almost a third. The 2021 figure was already comparatively low due to the impact of the pandemic and associated lockdowns.

The Society of Motor Manufacturers & Traders (SMMT) attributes the current decline to a shortage of components – particularly semiconductors – and problems with the global supply chain. It also cited the high price of electricity as a pain-point for car-makers.

Output in March fell by more than a third, down by -33.4% year-on-year, with 76,900 units made compared with 115,498 in the same month last year. This decline resulted in the weakest March since the financial crisis in 2009, when 62,000 cars were built.

The SMMT is calling for the government to grant the car industry relief on energy costs in the same way as it is given to energy-intensive industries such as steel production. It also wants UK firms to be given access to low cost and low carbon energy on the same footing as its European competitors.

Mike Hawes, SMMT chief executive, said: “Two years after the start of the pandemic, automotive production is still suffering badly. Recovery has not yet begun and, with a backdrop of an increasingly difficult economic environment, including escalating energy costs, urgent action is needed to protect the competitiveness of UK manufacturing. 

“We want the UK to be at the forefront of the transition to electrified vehicles, not just as a market but as a manufacturer so action is urgently needed if we are to safeguard jobs and livelihoods.”

James Hind, CEO of car trading site carwow, said: “Demand for new cars is still strong and, in many cases, consumers are prepared to wait. We aren’t seeing the drop in consumer confidence impacting new car demand yet.

“However, many of those that aren’t prepared to wait are switching their interest to electric vehicles, which are less impacted by production issues – plus car manufacturers are prioritising EV production, meaning there are plenty of options to choose from.

“The other knock-on effect of course is to the second-hand car market. As motorists struggle to get hold of new models, many are turning to the second-hand car market, and as a results, demand is rising and so are prices.

“Anyone looking to switch their car might want to do it now. They could get a great price for their second hand petrol or diesel car – and potentially get an affordable, new EV much quicker than a new petrol or diesel vehicle.”

13 April: UK Inflation Rockets To 30-Year High

Inflation leapt to a new 30-year high in the year to March 2022, according to the latest figures from the Office for National Statistics (ONS).

Forced higher by surging fuel costs as a result of the conflict in Ukraine, the Consumer Price Index (CPI) rose at an annual rate of 7% in the 12 months to March, up from 6.2% in February.

The latest inflation figure sharply exceeded City expectations and came a day after consumer price inflation in the US surged to a 40-year high of 8.5% in the year to March 2022.

Rising prices put an extra squeeze on household finances already gripped in a cost-of-living crisis. Commentators warn UK inflation could rise further beyond 8% before starting to level off by the end of the year.

UK inflation in March was more than three times the 2% target set for the Bank of England (BoE) by the government. It was also substantially higher than the rate of “around 6%” that the BoE forecast at the time of its last bank rate-setting meeting in March.

The bank rate currently stands at 0.75%. Today’s inflation figure will add extra pressure on the BoE’s Monetary Policy Committee to raise interest rates once again on 5 May. The BoE has already raised the rate three times since December 2021.

Sharp increase

Grant Fitzner, ONS chief economist, said: “Broad-based prices saw annual inflation increase sharply again in March. Among the largest increases were petrol costs, with prices mostly collected before the recent (5p per litre) cut in fuel duty, and furniture.

“Restaurant and hotel prices also rose steeply in March while, after falling a year ago, there were rises across a number of different types of food.”

Paul Craig, portfolio manager at Quilter Investors, said: “Last month’s Spring Statement did little to quell the fears of those already feeling the squeeze financially, and the introduction of the new energy price cap and the national insurance increase has further increased the pressure. 

“With wages failing to keep up and pensions not rising by a similar amount, things are going to get tough for a lot of consumers.”

Martin Beck, chief economic advisor to the EY ITEM Club, said: “There will be another significant increase in inflation in the April data, when we expect the CPI rate to rise to at least 8.5%. This will be caused by the 54% rise in the energy price cap and the VAT rate for the hospitality sector being restored to 20%.

“That should represent the peak. But with the war in Ukraine potentially helping to keep food and oil prices elevated for a prolonged period, and another rise in the energy price cap on the cards for October, inflation will be slow to fall back. Over 2022 as a whole, we expect CPI inflation to average close to 7%.”

12 April: US Inflation Soars To 40-Year High

US consumer price growth surged by 8.5% in the year to March 2022, surpassing Wall Street’s expectations and propelling the country’s inflation rate to its highest figure in more than 40 years.

Today’s increase in the consumer price index, as reported by the US Bureau of Labor Statistics, was caused by rising costs for energy, food and accommodation as the impact of Russia’s invasion of Ukraine began to take effect.

Last month Joe Biden, the US President, banned all imports of oil and gas from Russia following the conflict in Ukraine, which started at the end of February.

Commentators suggested the latest figure will only pile extra pressure on the US Federal Reserve to accelerate the pace of the interest rate increases it announces in a bid to tame inflation.

Last month, the Fed raised interest rates from 0.25% to 0.5% – their first increase in four years. Along with other central banks, such as the Bank of England, the Fed has an inflation target of 2%. The next Fed rate-setting meeting is on 3-4 May.

UK inflation, as measured by consumer prices, currently stands at 6.2%, while the BoE bank rate is 0.75%. The BoE’s rate-setting Monetary Policy Committee is next due to meet at the beginning of May, with its decision released on 5 May.

Countries worldwide are facing severe inflationary headwinds at the current time. Retail inflation in India last month rose to a 17-month high of 6.95% from 6.07% in February 2022. Consumer prices in Turkey in the year to March 2022 hit 61%, a rise of seven percentage points on the previous month.  

Hinesh Patel, portfolio manager at Quilter Investors, said: “The Fed will feel emboldened today to press ahead with its aggressive hiking of interest rates as it looks to combat inflation. While used car prices and other non-essential items have begun to reach their price peak, the headline figures today illustrate how much of this is an energy-related shock.”

Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, said: “The Fed has a tricky task ahead of it and historically has struggled to battle inflation without lowering economic growth.”

29 March: Poorer Households “Facing 10% Inflation”

Typical household energy bills could rise to nearly £2,500 by autumn this year, according to an influential forecasting group.

The EY Item Club (EYIC) says the rise in energy and commodity prices in part caused by the Ukraine conflict will have a severe effect on households and drag back UK economic activity.

It says rising prices will add to UK inflation already at “significant” levels, predicting inflation will peak at a 40-year high of 8.5% next month and forecasting that prices will still be growing by 6% at the end of 2022.

EYIC is also warning that, while households across the economic spectrum have experienced similar levels of inflation of late, the 54% rise in typical home energy bills this April means lower-income households could experience an inflation rate of around 10%.

With further energy bill increases expected in October, EYIC says lower-income households are likely to experience persistently higher levels of inflation relative to their higher-income counterparts, well into 2023.

Martin Beck, chief economic adviser to the EYIC, said that, while the recent Spring Statement contained some help for households, a consumer squeeze is on the way: “Consumer spending is a key part of the UK economy, and the expectation has been that the passing of the worst of the pandemic would spur a corresponding consumer recovery. But the war in Ukraine and rising energy prices mean that outlook has dimmed.”

23 March: Inflation To Hit 8.7% Later This Year – OBR

• UK inflation forecast to peak at 8.7% this autumn
• Inflation to remain above 7% until 2023
• Household incomes predicted to fall by largest-ever amount

The Office for Budget Responsibility (OBR), the government’s fiscal watchdog, has predicted that UK inflation will peak at 8.7% later this year as rising prices are further exacerbated by the ongoing Russian invasion of Ukraine.

UK inflation as measured by the Consumer Price Index (CPI) jumped to a 30-year high of 6.2% in the year to February 2022. In recent months, rising inflation has been driven by soaring global prices for energy, petrol, food and durable goods.

In its report published alongside today’s Spring Statement, the OBR said it expected CPI inflation to peak at 8.7% in the fourth quarter of 2022. It also forecasted that UK inflation would remain above 7% in each quarter from the second quarter of 2022, until the first of quarter of 2023.

The OBR said it also expected rising inflation to be above earnings growth over the next year. It added that, despite the policy measures announced by Rishi Sunak, Chancellor of the Exchequer, in the Spring Statement, there would be a net increase in taxes across the economy starting from next month.

As a result, the OBR predicted that household post-tax incomes adjusted for inflation would fall during the tax year 2022/23 by 2.2%, their largest-ever drop since records began in the 1950s.

23 March: Inflation Hits 30-Year High Ahead Of Spring Statement

UK inflation soared to a new 30-year year high in the year to February 2022, according to the latest figures from the Office for National Statistics (ONS).

The figures will add pressure on Chancellor Rishi Sunak to announce extra financial support for households already facing a severe cost-of-living crisis when he delivers his Spring Statement at lunchtime.

The consumer price index (CPI) rose at an annual rate of 6.2% in the 12 months to February, up from 5.5% the previous month, its highest level since 1992. The figure overshot forecasts which had predicted a rise of 5.9%.

CPI increased by 0.8% in February 2022, the largest monthly rise between January and February since 2009.

In recent months, steepling inflation has been driven by soaring global prices for energy, petrol, food and durable goods. The ONS says the largest contributors to the latest increase in the monthly rate came from transport, household goods and furniture, while the cost of food and non-alcoholic drinks was also higher.

Today’s figures do not account for further price rises caused by the war in Ukraine, which started at the end of February.

Grant Fitzner, ONS chief economist, said: “Inflation rose steeply in February as prices increased for a wide range of goods and services, for products as diverse as food to toys and games. Furniture and flooring also contributed to the rise in inflation as prices started to recover following new year sales.”

Paul Craig, portfolio manager at Quilter Investors, said: “All eyes will be on the Chancellor today as he presents his Spring Statement and announces measures the government will take to tackle the ongoing cost-of-living crisis. 

“This morning’s inflation data shows just how dire the situation is, and there is a clear need for the government to act to help save many from slipping into financial difficulty as their wages are quickly swallowed up.”

Dan Boardman-Weston, CIO at BRI Wealth Management, said: “The data continues to point towards another few months of rises in the rate of inflation, but we expect this to ease as we head into the summer.”

The Bank of England, which raised interest rates to 0.75% last week, has forecast that inflation will hit 8% in the spring, with further rises later in the year pushing it towards 10% and possibly beyond.

17 March: Bank of England Hikes Interest Rate To 0.75% In Bid To Tackle Inflation 

The Bank of England has raised the Bank rate of interest to 0.75%, an increase of 0.25 percentage points. The move follows a similar increase by the Federal Reserve in the United States yesterday, which saw rates there increase from 0.25% to 0.5% (see story below).

Central banks are increasing rates in a bid to remove inflationary pressures triggered by rising energy, fuel and food prices. The latest UK inflation rate, announced last month, is 5.5%, but this is expected to rise steeply when the impacts of the conflict in Ukraine are factored into the calculation.

Prior to the conflict, the Bank of England said inflation would rise above 7% this spring. Some forecasters are saying a rate above 8% is possible, largely due to a 54% increase in domestic energy bills, but the most pessimistic have forecast rates above 10%.

The most recent inflation figure for the US is 7.9% – a 40-year high. Again, this is expected to rise further in the coming months.

The Bank of England has now increased the Bank rate three times since December 2021, and more rises may be forthcoming.

This will be bad news for those with variable rate and tracker mortgages, whose repayments likely increase to reflect the higher cost of borrowing. Homeowners with fixed rate deals will likely have to pay more when their term comes to an end and they need to find another loan.

The news will be more positive for savers if institutions pass on the increase in rates.

The next Bank of England Rate announcement is due on 5 May.

16 March: US Raises Interest Rates, Bank of England Mulls Next Move

The United States Federal Reserve has increased interest rates from 0.25% to 0.5% today in a bid to counter 40-year high inflation rates. This is the first increase in US interest rates since 2018.

The country’s consumer price index rose by 7.9% in February, although the figure did not take account of the latest inflationary pressures flowing from the conflict in Ukraine and economic sanctions imposed on Russia (see story below).

The Fed has an inflation target of 2%. The interest rate rise is intended to cool the economy by reducing the availability of ‘cheap’ money. Further rate hikes may be made in the coming months – in the Fed’s words: “… ongoing increases in the target range will be appropriate.”

The Bank of England will announce its latest decision on the UK Bank rate tomorrow (Thursday). The rate has increased twice since December and now stands at 0.5%.

The UK rate of inflation stands at 5.5% (the Bank’s target is also 2%). Economists are expecting a rise of 0.25 percentage points to take the rate to 0.75%, which would feed through to mortgage rates – although many lenders have ‘priced in’ a rate rise in their current offers.

Existing borrowers on variable rate and tracker deals would see their cost of borrowing increase in the next couple of months. Those on fixed rates would likely be faced with more expensive loans when their current deal comes to an end.

There has been some speculation that the Bank rate could double to 1% given the mounting inflationary pressures in the economy. The Bank of England has already conceded that inflation will top 7% this spring, but again the prediction was made ahead of the Ukraine crisis. Some commentators have suggested inflation could hit double figures in the next few months.

14 March: ONS Overhauls Inflation Price Basket

The Office for National Statistics (ONS), which measures the rate of inflation in the UK, has announced changes to the basket of items it uses to track how prices are moving.

The ONS tracks around 730 prices for goods and services for its consumer price indices. It updates its basket annually “to avoid potential biases that might otherwise develop, for example, because of the development of entirely new goods and services. These procedures also help to ensure that the indices reflect longer-term trends in consumer spending patterns.”

The latest updates sees the inclusion of a range of new items, with others being dropped because of changing patterns of consumer behavior. Many of the changes can be seen to reflect the impact of the pandemic and the associated lockdowns.

New items include meat-free sausages, sports bras and crop tops, anti-bacterial surface wipes, craft and hobby kits for adults and pet collars.

Items dropped from the list include men’s suits, coal, doughnuts and hard-copy reference books.

Reasons for change

Not all the changes can be traced directly to the pandemic. For example, meat-free sausages have been added to expand the range of “free from” products in the basket, reflecting the growth in vegetarianism and veganism. 

However, antibacterial surface wipes have been added to the list of cleaning products to represent current cleaning trends together with the demand for antibacterial products in response to COVID-19.

Similarly, pet collars have been introduced because of increased consumer spending on pet accessories linked to the rise in pet ownership more generally since the start of the pandemic.

Changes are also made to the basket in response to wider changes in society. For example, the sale of domestic coal will be banned in 2023 as part of the government’s actions to combat climate change.

The ONS says dropping it from the basket in 2022 protects the index from the possibility of being unable to collect price information towards the end of the year and from abnormal price movements, which could be seen as the deadline approaches for the ban to come into effect.

It says that, in some cases, items are dropped to reflect decreasing expenditure, such as doughnuts: “Research and anecdotal evidence from retailers has indicated that sales have fallen, potentially because of the rise in homeworking. 

“Most individual cakes, which is what ‘doughnuts’ represents, are sold in multipacks, and a separate multipack cake item remains in the basket.”

10 March: US Inflation Hits 40-year High

The US consumer price index surged by 7.9% in the year to February 2022, propelling the country’s inflation rate to its highest figure since January 1982.

The increase, reported today by the US Bureau of Labor Statistics, was driven higher by rising costs for gas, food and housing, but did not factor in most of the energy price rises brought about following Russia’s invasion of Ukraine on 24 February.

Before the latest inflation news, the US Federal Reserve was already under considerable pressure to tame inflation by raising interest rates when it meets next week.

In addition to imposing sanctions on Russia’s central bank and excluding the country from the global financial system, the US administration, led by President Joe Biden, has banned imports of Russian oil and gas.

Last month, faced with the same inflationary headwinds affecting all major economies, the Bank of England (BoE) increased the Bank rate from 0.25% to 0.5%. This was the second increase in the space of three months, following a rise from 0.1% to 0.25% in December 2021.

The BoE’s Monetary Policy Committee also meets next week to decide if further monetary tightening is required as UK households continue to grapple with a cost-of-living crisis caused by soaring inflation exacerbated by the relentless surge in energy prices.

Any rise in the UK bank rate would inevitably be reflected in increased interest rates for borrowers, particularly those with mortgages.

Richard Carter, head of fixed interest research at investment firm Quilter Cheviot, said: “Any hopes that inflation may have been starting to reach its peak in the US have been well and truly dashed. Given this data captures the period before Russia’s invasion of Ukraine, inflation won’t be stopping there. A rate hike at the Fed’s meeting next week looks like a certainty.”

Caleb Thibodeau at Validus Risk Management said: “It will take a formidable change in circumstances to steer the Fed away from a hike next Wednesday and at all subsequent Federal Open Market Committee meetings this year.”

16 February: Inflation Hits 30-Year High With Worse To Come This Spring

UK inflation, as measured by the Consumer Price Index (CPI), rose to a 30-year high in the year to January 2022, according to the latest figures from the Office for National Statistics (ONS). 

Consumer prices increased at an annual rate of 5.5% in January 2022, up from 5.4% the previous month and well above the figure of 0.7% recorded in January last year. Prices last accelerated this quickly in March 1992.

Inflation is now over three percentage points higher than the 2% target set for the Bank of England (BoE) by the government. The BoE forecasted recently that UK inflation will exceed 7% this spring before starting to fall back after that. 

The ONS said clothing, footwear, the rising costs of household goods and rent increases helped push up prices last month. But it added that this January’s rise was partially offset by lower prices at the petrol pumps, following record highs at the end of last year.

Fuel prices have since peaked once more, hitting £1.48 per litre for petrol and £1.51 per litre for diesel. Along with the hike in the domestic energy cap by 54% in April, this is the reason for the Bank’s gloomy short-term forecast.

Grant Fitzner, chief economist at ONS, said last month witnessed traditional price drops in some sectors but that “it was the smallest January fall since 1990, with fewer sales than last year.” 

The latest ONS announcement is likely to pile more pressure on the BoE to take an aggressive stance on interest rates. The BoE has already announced two rate rises in the space of the last three months. The Bank rate currently stands at 0.5%.

Jason Hollands of investing platform Bestinvest said: “Further and material increases in inflation are almost certainly coming, in part due to the lifting of the cap on energy bills. So, the thumb screws are going to continue to tighten over the coming months, with the Bank forecasting inflation will hit 7% by Easter.”

Rupert Thompson at wealth manager Kingswood said: “Inflation will head higher still over coming months, likely peaking at around 7.5% in April when the increase in the energy price cap feeds through. Today’s data leave a further 0.25% rate hike in March looking all but a done deal.”

Last month, four of the nine members of the Bank’s Monetary Policy Committee, which decides interest rates, voted for an increase in the Bank rate of half a per cent to 0.75%. If this hawkish sentiment prevails at the next meeting in March, the rate could double to 1%.

19 January: Consumer Prices Index Highest In 30 Years

UK inflation, as measured by the Consumer Prices Index, jumped to 5.4% in the 12 months to December 2021 – its highest level in 30 years – according to the latest figures from the Office for National Statistics (ONS).

The CPI figure last reached this level in March 1992. 

In line with recent economic announcements around the world UK inflation has spiked in recent months – November’s CPI figure came in at 5.1% – leaving UK households facing the threat of a deepening cost-of-living crisis. The US recently revealed a figure of 7.5%.

December’s figure is well over three percentage points higher than the Bank of England (BoE) 2% target, set by the government. 

The latest inflation data could prompt a second, rapid rise in interest rates following on from the Bank of England’s decision before Christmas to hike the bank rate to 0.25% from its all-time low of 0.1%.

According to the ONS, a range of factors are responsible for the latest inflation increase. These include rising prices for food, restaurant bills, hotel costs, furniture, household goods, clothing and footwear in the run-up to Christmas. 

But Grant Fitzner, ONS chief economist, said there was little evidence that pandemic-imposed restrictions had contributed to rising prices: “The closures in the economy last year have impacted some items but, overall, this effect on the headline rate of inflation was negligible.”

Interest rates decision

Paul Craig, portfolio manager at Quilter Investors, said: “The Bank of England was vindicated in its decision to hike rates in December in the face of Omicron uncertainty, but it could still go either way when its Monetary Policy Committee [MPC] meets in early February.

“The MPC will be faced with a difficult trade-off between ensuring financial stability or helping households cope with a cost-of-living crisis that is set to squeeze household finances over a difficult winter period.”

What to expect this April

In addition to an increase in National Insurance Contributions in April and a sustained freezing of personal tax allowances, which will push many earners into higher tax brackets, households are facing the prospect of huge energy bill increases due to a rise in the official price cap.

Analysts suggest prices could increase by up to 50% when the cap is adjusted in April. The scale of the increase will be announced in early February.

Last autumn, having temporarily suspended calculations based on the so-called ‘triple lock’, the government confirmed it would be increasing a range of state benefits from April 2022 based on September 2021’s CPI figure of 3.1%.

For 2022-23, the full State Pension will increase from its present rate of £179.60 a week to £185.20 a week (£9,630 a year).

Working-age benefits, benefits to help with additional needs arising from disability, and carers’ benefits will all rise by the same rate of 3.1% from April as well.

Other payments due to rise include Universal Credit, Personal Independence Payments, Child Benefit, Jobseeker’s Allowance, Income Support and Pension Credit.

15 December: UK Inflation Reaches Highest Level In Over 10 Years

Inflation, as measured by the Consumer Price Index (CPI), rose by 5.1% in the 12 months to November 2021 – its highest level in over a decade – according to the latest figures from the Office for National Statistics (ONS).

The inflation figure has been on a sharp upward trajectory in the latter part of 2021 – October’s figure came in at 4.2% – and is now at its highest level since September 2011. 

The latest figure was well above City forecasts of 4.7% and now stands at more than double the Bank of England’s 2% target, set by the government. The steep rise from October to November could contribute to a potential hike in interest rates when the UK’s central bank reveals its final decision of the year on the subject later this week. 

Grant Fritzner, ONS chief economist, said: “A wide range of price rises contributed to another steep rise in inflation.” 

He added that the price of fuel had increased notably, “pushing average petrol prices higher than we’ve seen before”. Other contributors included increased clothing costs, along with price rises for food, second-hand cars and increased tobacco duty.

According to Canada Life, the change in inflation leaves the UK’s near-40 million households collectively needing to find an extra £39.6 billion a year to maintain their standard of living compared with 12 months ago.

Andrew Tulley, technical director at Canada Life, said: “The latest inflation numbers give us little hope for any financial festive cheer. We are all feeling the pinch and the reality is the average UK household will need to find over a thousand pounds extra next year to maintain current living standards.”

The UK figures follow recent inflation data from the US which showed that consumer prices in November had increased at their fastest pace in nearly 40 years. 

Last week, the US Bureau of Labor Statistics reported that its consumer price index had risen by 6.8% in the year to November. The last time the figure had increased so rapidly was in 1982.

6 Dec: Bank Of England: Inflation Could ‘Comfortably Exceed’ 5% in 2022

The Bank of England has warned that inflation could ‘comfortably exceed 5%’ in the next few months, when energy regulator Ofgem puts up its energy price cap in April 2022, raising the cost of energy bills for millions of UK households.

The cap is based on trailing average prices in wholesale energy markets – with the relevant period for the next adjustment in April falling between August 2021 and February 2022.

Speaking to the Leeds Business School, the Bank’s deputy governor of monetary policy, Ben Broadbent, said: “Two-thirds of the way through we can already be reasonably certain (unfortunately) of a further significant rise in retail energy prices next spring.”

Ofgem’s current price cap, which took effect on 1 October, is set at a record £1,277 a year or £1,309 for a prepayment meter tariff cap. The cap applies to households on a standard variable tariff (SVTs) consuming an average amount of energy. It refers to unit price of energy meaning that – depending on how much energy is used – some households will pay less or more.

Inflation is already running high, with annual growth recording 4.2% for October, as measured by the Consumer Prices Index (CPI). This was up from 3.1% in September and is more than double the 2% target set by the Government.

The next inflation announcement is on 15 December.

Mr Broadbent told Leeds Business School: “I’m coming here at an extraordinary time for the economy in general and for monetary policy in particular.”

17 Nov: Inflation Near 10-Year High, Prompts Rate Hike Expectations

Inflation – as measured by the Consumer Price Index (CPI) – rose by 4.2% in the 12 months to October 2021, according to figures out today from the Office for National Statistics. This follows a 3.1% rise recorded in September,

Today’s figure is the highest 12-month inflation rate since November 2011, when the CPI annual inflation rate was 4.8%.

The figure is more than double the Bank of England’s 2% target, set by the government. This is stoking expectations the Bank will hike its key interest rate in December in a bid to cool the economy – a move that would likely trigger an increase in mortgage rates.

The current rate of 0.1% was widely tipped to increase earlier this month, but the Bank decided to hold fire at its meeting on 4 November.

The steep climb in the cost of living is blamed on the increase in the domestic energy price cap on 1 October, rising forecourt pump prices and inflationary pressures across the economy as companies struggle with increases in the cost of raw materials.

Prices in hotels and restaurants have also increased relative to last year because hospitality firms no longer benefit from a reduction in their VAT bills.

Economists warn that any increase in the Bank Rate will not affect the trajectory of inflation for several months. Dan Boardman-Weston at BRI Wealth Management, said: “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.”

Supply and demand

Inflation in the United States topped 6% in October. As with the UK, the hope is that the reasons for prices rising so sharply are “transitory”, but global supply chain issues married to increasing demand as economies emerge from the Covid-19 crisis is resulting in increasingly gloomy forecasts in some quarters.

However, Mr Boardman-Weston cautions against any knee-jerk reaction: “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 needs to be careful 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.”

While mortgage customers will view the latest inflation figures with concern, savers may see a glimmer of hope that they may earn a better rate on their accounts – although any improvement would need to be set into the context of rising prices.

The Bank will announce its latest Bank Rate decision on 16 December.

20 October: Inflation Dips To 3.1% In September, Sets Level Of 2022 Pension Rise

UK inflation bucked a recent upwards trend and dipped slightly last month, according to the latest official figures from the Office of National Statistics (ONS).

The Consumer Prices Index (CPI) measure rose by 3.1% in September 2021, slipping back from 3.2% in August. 

The ONS said increased prices for transport were the main contributor to an overall rise in prices, along with household goods, food and furniture.

It added that restaurants and hotels helped pull the inflation rate lower. This was because prices rose less this summer compared with the same time last year, when the government’s Eat Out To Help Out scheme was running.

Despite a month-on-month fall in the inflation rate, the level remains well above the Bank of England (BoE) target of 2%. 

September’s inflation figure is unlikely to have an impact on the BoE’s imminent decision on interest rates, due at the beginning of November, as a pause in the rate moving upwards had been anticipated.

Commentators believe September’s dip in inflation was a blip, with further rises anticipated in the coming months. This is because the latest numbers have yet to take into account either the recent surge in energy prices or the petrol pump crisis of a few weeks ago. 

Laith Khalaf, head of investment analysis at brokers AJ Bell warned that: “Inflation will still get worse before it gets better. Inflation is being broadly felt, seeing as the biggest drivers are housing and transport costs, which are unavoidable for almost everyone in the country.”

Pension determinator

September’s inflation figure of 3.1% will be used to determine next year’s rise in the state pension. 

This means that, from April 2022, a pensioner who receives the new full state pension can expect a rise from £179.60 a week to £185.15. For those on the basic state pension, the current figure of £137.60 will rise to £141.86 next spring.

Next year’s increase could potentially have been as high as 8%, had the government decided not to scrap its so-called ‘triple lock’ for one year, on the back of an artificially distorted picture of UK wage growth following the pandemic. 

The triple lock aims to increase the state pension in line with the highest of three measures: 2.5%, CPI inflation and earnings. Earlier this year, the government said it would suspend the use of the latter after earnings data spiked as people returned to work following the termination of its furlough programme.

15 September: Inflation Hits 3.2% With Further Rises In Energy Pipeline

The UK inflation rate jumped sharply last month, according to the latest figures from the Office of National Statistics (ONS).

The Consumer Prices Index (CPI) rose by 3.2% in August, up from 2% a month earlier. The 1.2 percentage point rise is the largest recorded by the CPI National Statistic 12-month inflation rate series, which began in 1997. 

Inflation in the UK topped 10% in 1990 and was over 26% in 1975.

The latest figures mean inflation is now at its highest rate since March 2012 on the back of higher prices for transport, restaurants and hotels.

Last summer, prices for food and drink were discounted because of the government’s temporary Eat Out to Help Out response to the pandemic.

Used car prices also contributed to the rise. Demand is high because of a reduction in the supply of new models, which itself is attributed to a shortage of the computer chips used in their manufacture.

Rising energy prices are expected to fuel further increases in the rate of inflation over the coming months.

The latest CPI figure far exceeds the 2% official target set by the Bank of England (BoE). 

Jonathan Athow, deputy national statistician at the ONS, said: “August saw the largest rise in annual inflation month-on-month since the series was introduced almost a quarter of a century ago.

“Much of this is likely to be temporary, as last year, restaurant and café prices fell substantially due to the Eat Out to Help Out scheme, while this year, prices rose.”

August’s inflation rate rise coincides with a recent spike in prices across wholesale energy markets, a combination that could have serious financial implications for millions of the UK’s energy customers this winter. 

Last month, Ofgem, the UK’s energy regulator, announced it is raising its cap on standard variable rate default tariffs by 12% to £1,277, its highest-ever level. The new cap takes effect from 1 October, when the prepayment tariffs cap will rise by £153 to £1,309.

Around 15 million households will be hit by the cap increases. Ofgem recommends that those on default rates should switch their energy tariff to find a cheaper alternative. Prepay customers may also be able to save by switching.

Next month’s data, covering September’s inflation figures, will determine the level at which the state pension will be uprated from April 2022 under the new, temporary ‘double lock’ recently introduced by the government.

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Update 18 August: Inflation Rate Dips To 2%

The UK inflation rate slowed down last month according to the latest figures from the Office of National Statistics (ONS).

The Consumer Prices Index (CPI) rose by 2% in July, down from 2.5% a month earlier. The dip, driven by an easing in the price of clothing, footwear and recreational goods, means the inflation figure is now in line with the Bank of England’s official target of 2%.

Jonathan Athow at the ONS, said: “Inflation fell back in July across a broad range of goods and services, including clothing, which decreased with summer sales returning after the pandemic hit the sector last year.

“This was offset by a sharp rise in the price of second-hand cars amid increased demand, following a shortage of new models.”

Commentators say a dip in the headline inflation rate could be temporary. The Bank of England has forecast that consumer price growth could yet rise to 3% this month and peak around 4% later in the autumn.

Richard Hunter at Interactive Investor said: “The relief of a slowdown in inflation is likely to be short-lived, with upward pressures remaining in the pipeline.

“Cost inflation is still bubbling underneath the surface, both in terms of blockages in the supply chain elevating prices, as well as pressures on the labour supply. In addition, the proposed hike in energy prices will add some fuel to the inflationary fire as the year progresses.”

Despite a month-on-month fall in the CPI, Sarah Coles at broker Hargreaves Lansdown had this warning for savers: “Even at 2%, inflation can do serious damage to your savings, so we need to protect ourselves by refusing to settle for miserable rates from the high street (banking) giants. These usually offer 0.01% on easy access accounts, while the average (for all savings accounts) is 0.07%, and the most competitive without restrictions is 0.65%.

“Fixing your savings for 12 months will earn you up to 1.3%, which will significantly reduce the damage done by inflation,” she added.