Rising energy prices have pushed UK inflation to a 41-year high

(Bloomberg) — High energy bills pushed U.K. inflation even higher than expected to a 41-year peak in October, adding pressure on the Bank of England to raise interest rates again.

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The consumer price index rose to 11.1% from a year earlier, the Office for National Statistics said on Wednesday. That was more than the central bank’s peak forecast of 10.9 percent and the median of 10.7 percent that economists had expected.

Policymakers, led by Governor Andrew Bailey, who testified before parliament later on Wednesday, said they were prepared to raise borrowing costs sharply to prevent prices from spiraling. Inflation is now more than five times the BOE’s 2% target despite eight hikes in the benchmark borrowing rate over the past year.

The figures contrast with the outlook in the US, where speculation is growing that inflation may have peaked, allowing the Federal Reserve to hold off on raising interest rates. Russia has cut natural gas supplies to Europe since its attack on Ukraine, raising the price of electricity in the region’s wholesale markets.

“It’s not yet clear whether we’re hitting peak inflation for the year, but it’s still a tough time for public markets,” said Andrew Aldridge, partner at Deepbridge Capital.

The pound rose as much as 0.3% after the publication before quickly erasing gains. Money markets are adding up to 10 basis points to rate hike bets, pricing rates to peak around 4.65% by August.

What Bloomberg Economics Says…

“The only good news from October’s surprise CPI jump in the UK is that inflation has probably peaked. With the government’s six-month cap on energy prices, inflation is likely to begin to ease. This still won’t be enough for the Bank of England to significantly reduce the pace of tightening – our baseline scenario is a 50 basis point hike in December. However, the latest batch of CPI and labor market data raises the odds of another 75bp move at the next meeting.

–Anna Andrade, Bloomberg Economics. Click to REACT.

Treasury Secretary Jeremy Hunt said he would help the BOE return inflation to target by delivering “tough but necessary” measures to curb the Treasury’s budget deficit. He blamed Russian President Vladimir Putin’s invasion for “accelerating inflation around the world.”

“This insidious tax eats away at paychecks, household budgets and savings while thwarting any chance for long-term economic growth,” Hunt said in a statement. “We cannot have long-term, sustainable growth with high inflation.”

Rising energy prices were the biggest contributor to last month’s inflation data, despite a government program to cushion the impact on consumers. Gas prices rose almost 36.9% month-on-month, and electricity rose 16.9%.

Inflation would have been 13.8% if the government had not introduced an energy price guarantee, which caps the increase, the ONS said.

Wage growth has lagged behind price increases, leading to the steepest contraction in living standards in memory and putting pressure on Prime Minister Rishi Sunak’s government to act. Inflation for low-income households was 11.9% compared to 10.5% for wealthier ones.

On Thursday, Hunt is due to set out budget measures, including how the government will subsidize energy bills after the current package ends in April. He said his aim was to reduce debt while protecting the most vulnerable people.

“With the protective effect of the Energy Price Guarantee so evident in the data, the Chancellor will now be under even greater pressure to maintain the scheme for the foreseeable future,” said Kitty Usher, chief economist at the Institute of Directors, which represents the company executives.

Core inflation, which excludes energy, food, alcohol and tobacco prices, was unchanged at 6.5%. Food and drink prices jumped 2% in the month, with milk, cheese and eggs posting big increases, along with chocolate, jam, tomato ketchup, cooking sauces and fizzy drinks. Ten of 11 food categories rose, except for tea and coffee.

Spending on leisure activities has become more expensive in October. There was a downward effect on prices from transport costs, reflecting a shift to buying second-hand cars.

Gasoline and diesel prices fell 0.5% in the month after rising a year ago.

There is some evidence that the costs faced by firms are easing, with input prices rising less in the year to October than in September.

“October could mark a turning point as we expect the core rate of inflation to begin to decline 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 see price pressures ease.”

Read more:

  • UK’s Sunak urges company executives to adopt a pay cap

  • The UK labor market is fueling inflationary pressures as wages surge

  • The energy market is a sword of Damocles hanging over the UK’s new leader

  • UK inflation could hit 15% without extra energy support (1)

–With assistance from James Hirai, Harumi Ichikura and Mark Evans.

(Updates with BI analytics.)

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