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Surprise increase in inflation could lead to base rate hike

by: Emma Lunn
  • 22/03/2023
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Surprise increase in inflation could lead to base rate hike
The salad shortage and higher pub and restaurant alcohol prices contributed to the upward pressure on inflation last month. And this surprise rise may be enough to push the Bank of England to hike the base rate once again.

According to the Office for National Statistics (ONS), the Consumer Prices Index (CPI) rose by 10.4 per cent in the 12 months to February 2023, up from 10.1 per cent in January.

On a monthly basis, CPI rose by 1.1 per cent in February 2023, compared with a rise of 0.8 per cent in February 2022.

Although rising, the inflation figure was below a recent peak of 11.1 per cent in October 2022. The ONS’s indicative modelled estimates of CPI suggest that the October 2022 peak was the highest annual inflation rate since 1981.

The ONS said the largest upward contributions to the annual CPIH inflation rate in February 2023 came from housing and household services (electricity, gas, and other fuels), and food and non-alcoholic beverages. These were partially offset by downward contributions from recreational and cultural goods and services, and motor fuels.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 9.2 per cent in the 12 months to February 2023, up from 8.8 per cent in January but below a recent peak of 9.6 per cent in October 2022.

Kevin Brown, savings specialist at Scottish Friendly, said: “The expectation was that price rises would drop to single digits in February before continuing to fall over the remainder of 2023. But this latest spike will cast doubt over the OBR’s prediction that inflation will reach 2.9% at the end of the year.

“The Chancellor has been equally bullish about the prospect for inflation, but this unexpected rise will dent some of that recent optimism. It also presents a cruel blow for households who may have started to think that price rises were beginning to soften.”

 

Will the base rate rise again?

This surprise rise in the inflation rate has led some commentators to suggest that the Bank of England will raise the base rate when the Monetary Policy Committee makes an announcement tomorrow. Up until today, experts generally expected the base rate to be held at 4 per cent.

While inflation continues to remain elevated, the Bank of England has a fine line to tread between restoring price stability and limiting additional pressure on the banking sector.

Danni Hewson, head of financial analysis at AJ Bell, said: “After three months of successive declines, the expectation had been for another slight fall in the headline rate as prices gradually trundle back towards that rather elusive 2% target. But the Government’s narrative has just suffered a plot twist and it’s a twist that couldn’t have come at a more inopportune moment.

“After two weeks of instability on financial markets, there had been growing expectation that the Bank of England may take a pause in its rate hike journey, and that can’t be ruled out, but today’s upward shift will be akin to popping a rooster into the henhouse.”

Richard Carter, head of fixed interest research at Quilter, said: “Given the market movements of late, the [rise in inflation] puts the Bank of England in an incredibly difficult position as it may not be enough for the Bank of England to press pause on the rate hikes. But with this inflation reading, the picture is incredibly clouded and the case for further rate hikes is strengthened.”

And Susannah Streeter, head of money and markets at Hargreaves Lansdown, now believes a rate rise is more likely than not.

She said: “It had been touch and go about whether the Bank of England will raise rates but now with consumer price inflation rising, it looks increasingly likely a hike will voted through tomorrow.  Although the banking turmoil will be front of mind, this latest snapshot and ongoing worries about a tight labour market are likely to tip the balance in favour of a rate hike.”

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