UK Inflation Unexpectedly Accelerates To 10.4%

UK consumer price inflation unexpectedly accelerated in February after slowing for three straight months, adding to the dilemma of the Bank of England policymakers who are set to decide this week whether to raise interest rates this month in the backdrop of the financial market turmoil.

Consumer prices increased 10.4 percent annually in February after a 10.1 percent gain in January, the Office for National Statistics reported Wednesday. Inflation was forecast to slow to 9.9 percent.

Headline inflation had peaked at 11.1 percent in October 2022 to mark the highest level since 1981.

Core inflation that excludes energy, food, alcoholic beverages and tobacco also accelerated in February. The rate advanced to 6.2 percent from 5.8 percent a month ago, while it was forecast to slow marginally to 5.7 percent.

An unexpected rise in inflation indicates that the UK economy is still in the midst of a stubborn peak, British Chambers of Commerce Head of Research David Bharier said.

The latest forecast from the Office for Budget Responsibility that accompanied the Spring Budget announcement last week, suggested that inflation will fall to 2.9 percent by the end of 2023.

In February, the central bank had raised its benchmark rate by half a percentage point to 4.00 percent, the highest since 2008.

The Bank of England is expected to raise the rate by a quarter-point on March 23.

“We suspect the Bank will want to see more evidence before ending its rate hike cycle entirely, and that’s particularly true after these latest inflation numbers,” ING economist James Smith said.

The latest increase in overall inflation was mainly caused by price rises in the restaurants and hotels, food and non-alcoholic beverages and clothing and footwear.

Restaurants and hotel prices increased 12.1 percent annually, the biggest growth since July 1991. At the same time, food and non-alcoholic beverage prices surged 18.2 percent, which was the highest rate for over 45 years. Prices of clothing and footwear increased 8.0 percent in February.

These upward movements were partially offset by downward effects from recreation and culture, and from motor fuels within the transport division.

On a monthly basis, consumer prices increased 1.1 percent in February, in contrast to the 0.6 percent decrease in January. Economists had forecast a moderate 0.6 percent gain for February.

Another data from the ONS showed that output price inflation hit a one-year low in February after seven months of slowdown.

Output prices registered an annual increase of 12.1 percent in February, following a 13.5 percent rise in the previous month. This was also slower than economists’ forecast of 12.4 percent.

Month-on-month, output prices slid 0.3 percent to reverse the 0.5 percent gain in January. The decline confounded expectations for an increase of 0.2 percent.

At the same time, input prices climbed 12.7 percent annually. Economists had forecast the rate of growth to slow to 12.0 percent from 14.7 percent in January.

Input prices logged a 0.1 percent monthly fall in February. This was in contrast to January’s 0.4 percent rise and economists’ forecast of 0.2 percent increase.

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