Driven by higher transport and energy costs, the UK Consumer Price Index rose 4.2% in the year to October, according to official data released on Wednesday. This is the index’s biggest gain since November 2011.
Demand rebounded quickly after the easing of Covid-19 restrictions, shortages of goods and labor and rising energy costs are pushing up prices around the world. The UK is also feeling the fallout from Brexit, which adds to the costs of doing business with the European Union, its biggest trading partner.
But the October inflation data was even higher than what analysts expected. The pound rose against the US dollar and hit its highest level against the euro since February 2020 as investors bet on a rise in UK interest rates.
Kallum Pickering, senior economist at Berenberg, wrote: “The surprise of October inflation figures surprised us to support our expectations that the Bank of England would raise bank rates further. 15 basis points to 0.25% at the next monetary policy committee meeting on December 16. in a research note.
Higher official interest rates could increase borrowing costs for businesses and households, as well as encourage people to save more, thereby easing some of the heat of inflation.
Investors had been expecting the central bank to start raising interest rates when it met earlier this month. They chose to stay on course instead as they awaited more data on the job market, concerned that unemployment could rise as the UK government’s support for employers expire.
Some jobs concerns may have been bolstered by Tuesday’s news that the UK unemployment rate fell to 4.3% in September even as the country’s growth program ended.
Paul Dales, chief UK economist at Capital Economics, said: “As the labor market stabilized yesterday, October CPI inflation spiked more than expected in October causing A rate hike in December is even more likely.”