UK inflation rises to 30-year high

Inflation in the UK rose to 5.4% in December, a 30-year high, deepening a cost-of-living crisis that is squeezing household incomes and putting further pressure on the Bank. Central England to raise interest rates.

The large year-over-year increase in the consumer price index reflected a broad rise in the prices of most goods and services and again exceeded economists’ forecasts for a small increase in December to 5.2% from 5.1% in November.

Due to the unforeseen increase in inflation, the BoE is currently tied. It faces pressure to raise interest rates to cool spending and bring inflation down to its 2% target, but doesn’t want to tighten household budgets too far and undermine the recovery’s momentum.

Inflation is expected to climb even higher in spring to exceed 6%, with gas and electricity prices due to rise in April to reflect much higher wholesale energy prices.

December’s CPI inflation rate of 5.4% was the highest since March 1992, when the inflation rate fell from a peak of 8.4%. It also exceeded the two peaks of 5.2% in 2008 and 2011.

Line chart of year-over-year change in the consumer price index (%) shows UK prices rising at their fastest annual rate in 30 years in December

Prices in December rose significantly faster than earnings, with the latest wage growth at an annualized rate of just 3.8% in the three months to November.

Prime Minister Rishi Sunak said he understood “the pressures people are facing with the cost of living” and suggested that he would take steps to ease the burden, saying: “We will continue to listen Listen to everyone’s concerns as we did during the pandemic.”

The Office for National Statistics said the increase in inflation in December was broad-based and was driven higher by higher food prices, restaurant bills and the cost of hotels, furniture, and household appliances. Apparel, clothing and footwear increases in the run-up to Christmas. .

Grant Fitzner, chief economist for the ONS, said there is little evidence that the government’s Plan B coronavirus restrictions have pushed prices up. “Last year’s shutdown affected a number of items, but overall, the impact on the key inflation rate was negligible,” he said.

Inflation rates in the US and other European countries have also risen to their highest levels in decades.

Bar chart December Contribution annual CPI inflation 5.4% (percentage points) showing Widespread Price Rise for goods and services

Economists say the increase will put pressure on the BoE to act to show it can hold prices and prevent high inflation from becoming what companies and households consider normal.

Samuel Tombs, UK economist at Pantheon Macroeconomics, said further gains in December left the BoE “with little choice but to raise rates again in February”.

Most economists predict the rate will rise to at least 6.5% if the government does not act to stop the energy price hike in April, but is likely to hit 6% even if Sunak does act. to limit price increases.

“What is of particular interest is change,” said Kitty Ussher, chief economist at the Institute of Directors [in inflation] from November mainly comes from the increase in food prices. Not only does this provide further evidence that inflation is becoming more pervasive than transient, it also signals households facing rising costs of living this spring.” .

Food price inflation rose to a nine-year high of 4.5%.

Paul Dales, chief UK economist at Capital Economics, said that if gas and electricity prices rose by around 50% in April – and the prime minister did nothing to tame them – inflation could hit 7%.

The inflation rate as measured by the retail price index, which underpins interest rates on index-linked government bonds and student loans, rose to 7.5% in December, as well is the highest level in 30 years according to this index.

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