UK Inflation Surges to 10-Month High, Fueling Rate Cut Concerns
London, February 16, 2023 - UK inflation accelerated to its highest level in a decade in January, reaching 3%, up from 2.5% in December. The increase was driven by rising airfares, motor fuel, and food prices, as well as the recent imposition of value-added tax (VAT) on private school fees.
The figures, released by the Office for National Statistics (ONS), exceeded economists' forecasts of 2.8% and the Bank of England's (BOE) target of 2%. The surge is likely to dampen the BOE's willingness to cut interest rates further amid concerns over persistent inflationary pressures.
"Higher inflation makes a March interest rate cut by the Bank of England 'improbable,'" said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
Services sector inflation jumped to 5% last month from 4.4%, influenced by the introduction of VAT on private school fees and rising airfares. Additionally, food inflation increased to 3.1%, driven by higher costs for meat, bread, and cereals.
Core inflation, excluding volatile items such as energy, food, alcohol, and tobacco, rose to 3.7%, the highest since April 2022.
The pickup in inflation further distances the UK from the BOE's 2% target and is expected to be followed by further increases due to energy bill increases later this year. Despite recent reductions in interest rates, the central bank has cautioned that further cuts will be "gradual and careful."
Money markets currently anticipate two more rate cuts this year, bringing the rate down to 4%. However, the case for a cautious approach is supported by figures showing rising wage growth and a strong jobs market.
The latest data highlights the challenges faced by the Labour government amidst its falling poll numbers. Chancellor of the Exchequer Rachel Reeves has unveiled significant tax increases, intensifying cost pressures on businesses and households.