UK inflation poised to hit a 30-year high

The annual pace of UK CPI inflation jumped from 4.2% in October to 5.1% in November representing the highest rate in over a decade. That also means the UK’s inflation rate now exceeds the unemployment rate.  No economist foresaw that scenario at the start of 2021. Last month’s reading was stronger than expected with the Bank of England previously not expecting a breach above 5% previously until early next year. The latest inflationary news coupled with yesterday’s strong labour market data will make for an uncomfortable Monetary Policy Committee (MPC) meeting tomorrow.  

Until the arrival of the Omicron variant, the MPC were expected to raise interest rates by 15bps from the record low of 0.1% to 0.25% at tomorrow’s MPC meeting. This would mark the first December interest rate rise since 1994. However, the new added layer of uncertainty stemming from the Omicron variant has led economists to row back on expectations to increase rates until early in the new year. Indeed, in recent days some of those MPC members already voting for a rate hike in previous meetings have signalled that they may have to wait a bit longer. Yesterday the IMF said the Bank of England needed to increase interest rates now to prevent inflation from becoming ingrained and fuelling increases in wage demands. 

Increases in prices of petrol and second-hand cars were the key drivers of the latest surge in inflation.  However, price rises were broad-based across goods and services.  Consumer price inflation was as low as 0.4% y/y in February of this year and is now expected to peak closer to 6% than 5% in Spring 2022.  Any reading above 5.2% (which occurred on Sep-08 and Sep-11) will represent the highest reading since March 1992 (+7.1% y/y). So we are poised to see consumer price inflation hit a 30-year high in the coming weeks while the Bank of England’s Bank Rate (currently) remains at a record low.  

It is worth remembering that September’s CPI rate (3.1% y/y) is used to set the increase in welfare benefits, such as Universal Credit payments.  Similarly the majority of people working are unlikely to see wages keep up with inflation and will also see a fall in their standard of living. Clearly those that can least afford it will experience the biggest squeeze in their cost of living.  Inflation will be just one part of this squeeze, with tax rises the other. National Insurance Contributions are set to rise by 1.25 percentage points next April while income tax thresholds will be frozen for 4-years. The cost of living crisis is set to be the dominant economic story in 2022.

Selected items y/y inflation rates in November 2021

  • Consumer goods 6.5%
  • Consumer services 3.3%
  • Food 2.4%
  • Clothing 3.8%
  • Electricity 18.8%
  • Gas 28.1%
  • Liquid fuels (home heating oil) 85.3% 
  • Petrol 29.5%
  • Diesel 27.5%
  • Furniture and furnishings 11.7%
  • 2nd-hand cars 27.1%
  • Bicycles 15%
  • Articles for babies 15.2%

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