UK inflation has accelerated to the highest rate in 30 years, further squeezing living standards and increasing pressure on the Bank of England to raise interest rates again.
Consumer prices rose at an annual rate of 5.5 per cent last month, up from 5.4 per cent in December and well above the 0.7 per cent recorded in January 2021, data published by the Office for National Statistics showed on Wednesday.
Inflation in January was more than double the BoE target of 2 per cent — the highest since March 1992 when it reached 7.1 per cent.
Jack Leslie, economist at the Resolution Foundation think-tank, warned that high inflation “could drive the deepest squeeze on living standards in six decades”.
Core inflation, which excludes energy, food, alcohol and tobacco — goods with the more volatile prices — rose to 4.4 per cent in January, up from 4.2 per cent in the previous month.
The figures exceeded forecasts by economists polled by Reuters, who expected CPI inflation to remain at 5.4 per cent and core inflation to increase to 4.3 per cent.
The BoE expects inflation to peak at more than 7 per cent in April, when Ofgem, the energy regulator, will increase its default energy tariff price cap.
Rishi Sunak, chancellor, said on Wednesday that high inflation is a global challenge, but added that the government has “stepped in to provide millions of households with up to £350 to help with rising energy bills”.
However, Elizabeth Martins, economist at HSBC, argued that even with the fiscal support, higher inflation meant the squeeze on income would be “more intense” than previously expected.
Together with the strong employment data published on Tuesday, high inflation supports economists’ expectations that the Bank of England will raise borrowing costs again this year.
“With inflation now tracking above expectations on a consistent basis and no further CPI report set for release ahead of March’s BoE meeting, markets are likely to run with the idea of a 50 basis point hike from the bank at their next meeting,” said Simon Harvey, head of FX Analysis at Monex Europe, a foreign exchange company.
Samuel Tombs, economist at Pantheon Macroeconomics, said the strength in CPI inflation will persuade the BoE’s Monetary Policy Committee to increase bank rates to 0.75 per cent in March and 1 per cent in May.
Martins said there could be an additional rate rise in August, while wider market expectations are that policy rates will climb above 2 per cent within a year.
The central bank raised rates in December and February from their historic low of 0.1 per cent to 0.5 per cent.
Grant Fitzner, ONS chief economist, said that “clothing and footwear pushed inflation up this month” together with the rising costs of some household goods.
Energy prices continued to rise fast in January, with an annual pace of 23.2 per cent recorded. The Russia-Ukraine crisis could keep inflation higher for longer by triggering a further surge in wholesale energy costs, warned Suren Thiru, head of economics at the British Chambers of Commerce.
However, high inflation was broad-based last month, hitting a number of sectors. The price of food rose 4 per cent, with clothing and household goods up 6.3 per cent and 9.1 per cent respectively.
The cost of second-hand cars and bikes rose at double-digit rates, reflecting supply chain disruptions and high demand.
The retail price index, which is linked to government bonds and affects the costs of public borrowing, rose to 7.8 per cent in January, the highest since March 1991.
Isabel Stockton, economist at the Institute for Fiscal Studies, projected central government spending on debt interest this financial year to reach £69bn, £11bn higher than previously forecast.