Inflation in the UK unexpectedly rose in February due to rising food prices. This has increased the chances of another interest rate increase by the Bank of England this week.
Annual consumer price inflation measures the difference between February’s prices and the previous year. It rose from 10.1% to 10.4%, exceeding economists’ expectations.
According to the Office for National Statistics, the unexpected strengthening of inflationary pressures resulted from higher prices in food, clothing, and restaurants. Record highs in food price inflation reached 18.2 percent in February. Restaurant and hotel price growth was 12.1 percent, which is the highest level in 22 years.
According to the ONS, food prices are at their highest level in 45 years. This is adding pressures to households that have already been experiencing cost-of-living stress over the past year.
Vegetables saw the largest upward impact with their annual prices increasing by 18% — the highest rate of growth since February 2009. After bad weather in Africa and southern Europe, there was a shortage of vegetables and other vegetables in February. Also, electricity prices were higher for produce that had been grown outside of season in UK and northern Europe greenhouses. According to the ONS, prices for bread, cereals, chocolate, confectionery, ready-meals, sauces and hot beverages have been at their highest level since at least 2008.
Core inflation, which excludes volatile elements such as food and energy, rose to 6.2% in January from 5.8% in January. This indicates that underlying inflationary pressures remain strong despite the high borrowing costs since 2008. The US and the eurozone have both seen their core inflation remain stubbornly high, which has forced central banks to increase borrowing costs aggressively this year.
The Bank’s February inflation figures were released ahead of tomorrow’s interest rate decision. Rate-setters will decide whether or not to implement the 11th backward-to-back rate rise. In an effort to slow price inflation, the Bank has set an inflation target at 2 percent and has increased borrowing costs to their highest level since 2008.
Investors had already reduced their expectations for future rate increases before the inflation figures. This was after the spread of banking turmoil from the US to Europe, with the forced sale Credit Suisse at the beginning of the week. The money markets still expect a 25-basis point increase in interest rates on Thursday.
Retail price inflation, which is the cost that the government incurs to service inflation-linked debts, increased to 13.8% from 13.4% at the beginning of the year.
According to the Office for Budget Responsibility, after months of double-digit rates of inflation, UK prices are expected to drop rapidly to 2.9% by the end.
The chancellor, Jeremy Hunt, reacted to the inflation numbers by saying that the government must “stick to our plans to halve [inflation]” this year.
“We recognize how difficult it is for families across the country. As we work towards lowering inflation, we will provide cost-of-living support to families worth £3,300.