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Bank of England under pressure to increase interest rates after inflation rise

The Bank of England is under mounting pressure to increase interest rates next month after inflation rose to the highest level in…

By admin , in Money , at November 17, 2021 Tags: , ,

The Bank of England is under mounting pressure to increase interest rates next month after inflation rose to the highest level in a decade in October amid the squeeze on living standards from soaring household energy bills.

A sharp increase in gas and electricity prices pushed inflation as measured by the consumer prices index to 4.2% in October, up from 3.1% in September, according to the Office for National Statistics – the highest rate since November 2011.

In a sign of the rising pressure on household budgets before what could be a difficult winter, the figure was higher than was forecast by City economists, and more than double the 2% target set by the government for the Bank of England.

It comes after the energy regulator Ofgem lifted its consumer price cap after wholesale gas prices soared to record levels as economies around the world emerged from lockdown and supplies of Russian gas to Europe failed to meet demand.

Grant Fitzner, the chief economist at the ONS, said it was clear there would be further inflationary pressures in the coming months after the German government suspended its approval process for the Nord Stream 2 gas pipeline, triggering an increase in wholesale energy prices.

“You will see gas prices have gone up in the last day or two following the announcement from the German government on the Nord pipeline. It’s not clear that energy prices have peaked yet,” he said.

The jump in the annual inflation rate was also driven by higher prices in restaurants and hotels after a partial removal of a VAT cut for the hospitality sector, as well as soaring prices for secondhand cars.

Much of the increase reflected depressed price levels a year ago as the coronavirus pandemic dragged down economic activity around the world, including the worst recession in Britain for 300 years.

Inflation is based on the annual change in price for a basket of goods and services, meaning a temporary fall 12 months earlier can push up the headline rate. Economists expect that the inflation rate should ease as these factors drop out of the calculation.

However, the costs of raw materials, wages and transportation have risen sharply since economies reopened and the latest CPI numbers suggest businesses have started passing those increases on to their customers.

Threadneedle Street unexpectedly held back from raising rates this month, confounding financial market expectations. The Bank forecasts inflation will peak at close to 5% next year, in what it predicts will be a temporary increase, before gradually fading back towards its 2% target as disruption caused by the pandemic recedes.

Economists said the higher inflation rate and robust employment figures published on Tuesday would give the green light for a rise in interest rates in December from the current level of 0.1%, most likely to 0.25%.

Sterling rose to a 21-month high against the euro on the currency markets, hitting €1.19 amid anticipation of a rate rise. However, other analysts said there was little that higher rates would do to curtail inflation caused by severe supply bottlenecks, while warning that Britain’s economic recovery from Covid-19 remained incomplete.

Suren Thiru, the head of economics at the British Chambers of Commerce, said: “The Bank of England are facing a tricky trade-off between surging inflation and a stalling recovery. However, with the UK economy facing mounting headwinds, raising interest rates too early should be resisted to avoid damaging business and consumer confidence.”

The chancellor, Rishi Sunak, said several countries were experiencing higher inflation after the easing of lockdown restrictions. “We’re helping people get into work, progress and keep more of what they earn, through our plan for jobs and by effectively cutting taxes for workers receiving universal credit,” he said.

The UK is in the middle of the pack among the G7 group of leading economies, with inflation higher than in France and Italy but lower than in the US and Germany. US inflation has hit the highest level in 31 years, at 6.2%, amid severe disruption to supply chains.

The UK government has faced intense criticism for scrapping the £20-a-week uplift in universal credit in the biggest ever overnight benefit cut, as well as planning manifesto-busting tax increases and suspending the pensions triple lock.

Rachel Reeves, the shadow chancellor, said households would be left more than £1,000 worse off next year owing to higher levels of inflation. “Instead of taking action, the government are looking the other way, blaming ‘global problems’ while they trap us in a high-tax, low-growth cycle,” she said.

Jack Leslie, a senior economist at the Resolution Foundation, said the rate of inflation had increased at its fastest rate over the past year since at least 1989 – a shift that meant real wages were already falling and were likely to continue to do so for the next six months. “We could be set for a sustained period of shrinking pay packets,” he said.

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