(Bloomberg) -- Soaring energy bills drove UK inflation even higher than expected to a 41-year high in October, adding to pressure on the government and Bank of England to act.
The Consumer Prices Index rose to 11.1% from a year ago, the Office for National Statistics said Wednesday. That was higher than the Bank of England’s forecast for inflation to peak at 10.9% and more than five times the central bank’s 2% target.
The result increases the chances the Bank of England will raise interest rates again next month. Prime Minister Rishi Sunak said getting inflation under control is the primary goal of his government, the latest hint that the Treasury will rapidly rein in its spending even though the economy is headed into recession.
“People’s number one anxiety at the moment is the rising cost of living, it’s inflation,” Sunak said Wednesday at a meeting of Group of 20 leaders in Bali, Indonesia. “We are going to have to take some difficult decisions at home to protect ourselves against those and to start getting a grip on inflation.”
The figures contrast with the outlook in the US, where speculation is growing that inflation may have peaked, allowing the Federal Reserve to slow rate hikes. Russia slashed supplies of natural gas to Europe since its attack on Ukraine, driving up the cost of electricity in wholesale markets across the region.
“The only piece of good news from the UK’s October CPI surprise surge is that inflation has probably peaked,” said Ana Andrade, an analyst at Bloomberg Economics. “That won’t be enough for the Bank of England to materially scale back the pace of tightening just yet.”
Policy makers led by Governor Andrew Bailey, who testifies to Parliament later Wednesday, have said they’re prepared to raise borrowing costs forcefully to prevent spiraling prices. The pound rose as much as 0.3% after the release before quickly erasing gains. Money markets add as much as 10 basis points to rate hike bets, pricing interest rates to peak around 4.65% by August.
Chancellor of the Exchequer Jeremy Hunt said he’ll help the BOE return inflation to target by delivering “tough but necessary” measures to rein in the Treasury’s budget deficit. He blamed Russian President Vladimir Putin’s invasion for “driving up inflation around the world.”
“This insidious tax is eating into pay cheques, household budgets and savings, while thwarting any chance of long-term economic growth,” Hunt said in a statement. “We cannot have long-term, sustainable growth with high inflation.”
What Bloomberg Economics Says ...
“The BOE will be keeping a close eye on the Nov. 17 Autumn Statement, which has the power to change the path for interest rates -- although less so in the immediate future. We see rates peaking at 4.25% next year, but there are risks to our view in both directions.”
--Ana Andrade, Bloomberg Economics. Click for the REACT.
Rising energy prices made the biggest contribution to last month’s inflation figures, despite a government program to soften the impact on consumers. Gas prices surged almost 36.9% on the month, and electricity rose 16.9%.
Inflation would have been 13.8% had the government not introduced an energy price guarantee that limited the increase, the ONS said.
Wage growth is lagging the increase in prices, delivering the sharpest squeeze in living standards in memory and putting pressure on Prime Minister Rishi Sunak’s government to act. The inflation rate for low income households was 11.9% compared with 10.5% for more wealthy ones.
On Thursday, Hunt due to set out budget measures including how the government will subsidize energy bills after the current package finishes in April. He said his aim it to reduce debt while protecting the most vulnerable people.
“With the protective effect of the Energy Price Guarantee so apparent in the data, the chancellor will now be under even greater pressure to maintain the scheme into the foreseeable future,” said Kitty Ussher, chief economist at the Institute of Directors, which represents company executives.
Core inflation, which excludes energy, food, alcohol and tobacco prices, was unchanged at 6.5%. Food and beverage prices jumped 2% over the month, with milk, cheese and eggs all seeing large increases, along with chocolate, jam, tomato ketchup, cooking sauces and carbonated drinks. Ten of 11 food categories rose, the exception being tea and coffee.
The cost of leisure activities rose in price in October. There was a downward effect on prices from transport costs, reflecting a shift toward purchasing second-hand cars.
Petrol and diesel prices fell 0.5% in the month after an increase a year ago.
There was some evidence that the costs facing businesses are easing, with manufacturing input prices rising less in the year through October than in September.
“October could mark a turning point as we expect the headline rate of inflation to start falling in the coming months,” said Yael Selfin, chief economist at KPMG UK. “Looking ahead, the combination of weaker growth and the waning impact of global supply shocks could lead to easing price pressures.”
Read more:
- UK’s Sunak Urges Company Executives to Embrace Pay Restraint
- UK Labor Market Feeds Inflation Pressure With Jump in Wages
- Energy Market Is Sword of Damocles Hanging Over UK’s New Leader
- UK Inflation May Hit 15% Without Further Energy Support (1)
--With assistance from James Hirai, Harumi Ichikura, Mark Evans and Kitty Donaldson.
(Updates with comment from Sunak.)
©2022 Bloomberg L.P.
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