London: UK inflation climbed faster than expected to the highest in a decade, heaping pressure on the Bank of England to raise interest rates and tightening a squeeze on living standards for households.
Consumer prices rose 4.2 per cent from a year ago in October, the fastest pace since November 2011, the Office for National Statistics said Wednesday. The figure was up sharply from 3.1 per cent in September and the reading of 3.9 per cent expected by economists. The Bank of England says price growth could touch 5 per cent early next year.
The pound surged against the dollar, reaching $1.3473 after the report.
For now, the increase is being largely driven by temporary factors linked to the revival of global demand following the pandemic. However, the BOE is concerned that inflation could take root more widely if left unchecked. Strong labor market data this week reinforced expectations that policy makers will begin raising interest rates next month to return inflation to their 2 per cent target.
“The Bank of England are facing a tricky trade-off between surging inflation and a stalling recovery,” said Suren”Thiru, head of economics at the British Chambers of Commerce. “However, with the U.K. economy facing mounting headwinds, raising interest rates too early should be resisted.”
The pickup in inflation last month was driven by natural gas and electricity prices after regulator Ofgem allowed suppliers to hike tariffs by as much as 12 per cent to offset rising wholesale costs.
The prices charged for motor fuel, used cars and at restaurants and hotels also contributed to the sharp increase in inflation.
Households face the prospect of another steep rise in April, along with a sharp increase in payroll taxes. That could undermine the recovery by leaving people with less money to spend on other goods and services.
Rising prices also present a problem for Chancellor of the Exchequer Rishi Sunak by making it more expensive to inflation-linked government bonds. The Retail Price Index, which determines payments on index-linked gilts, rose to 6 per cent in October, the fastest pace since April 1991.
“Many countries are experiencing higher inflation as we recover from Covid, and we know people are facing pressures with the cost of living,” Sunak said in a statement. “We’re helping people get into work.”
Supply-chain disruptions boosted prices for a wide variety of goods and services. Core inflation, which excludes energy, food, alcohol and tobacco prices, jumped to 3.4% from 2.9%.
In a worrying sign for policy makers, companies are increasingly talking up the prospects of price rises to cover rising wage and other costs. If workers demand higher wages to maintain their living standards, inflation could prove more persistent than initially assumed.
Separate ONS figures showed cost pressures building further down the pipeline. The prices manufacturers pay for fuel and raw materials surged 13% in October compared with a year earlier, the highest since September 2008. In response, factories raised the prices they charge their customers by 8%, the most since September 2011.