UK inflation jumps to highest level in 30 years

Rising food prices are one reason for soaring inflation © AFP via Getty Images

UK inflation jumped to 5.4% in December, the highest in 30 years, exacerbating a cost of living crisis that squeezed household incomes and put more pressure on the Bank of England to raise interest rates.

The sharp annual rise in the consumer price index reflected a broad rise in the cost of most goods and services, and again beat economists’ forecasts for a modest gain in December, rising to 5.2% from 5.1% in November.

The Bank of England faced a dilemma, failing to foresee a surge in inflation. It is under pressure to raise interest rates to cool spending and reduce inflation to its 2 percent target, but it does not want to unduly squeeze household budgets and derail the recovery.

Inflation is expected to push further above 6% in the spring, and gas and electricity prices will rise in April to reflect a surge in wholesale energy prices.

CPI inflation of 5.4% in December was the highest since March 1992, when inflation eased from a peak of 8.4%. It also surpassed two peaks of 5.2% in 2008 and 2011.

The line chart of the year-on-year change in the consumer price index (%) shows that UK prices rose at the fastest annual rate in 30 years in December

Prices rose significantly faster than incomes in December, with the latest annual increase in overall wages at just 3.8% in the three months to November.

Prime Minister Rishi Sunak said he understood “the pressure people are facing in terms of the cost of living” and suggested he would take steps to ease the burden, saying, “We will continue to listen to people’s concerns, just as we do that has been done throughout the pandemic”.

The ONS said the December rise in inflation was broad-based and was driven by higher food prices, restaurant bills and the cost of hotels, furniture, household goods, clothing and footwear ahead of Christmas. .

ONS chief economist Grant Fitzner said there was little evidence the government’s Plan B coronavirus restrictions had pushed up prices. “Last year’s economic shutdown affected some items, but overall the impact on headline inflation was negligible,” he said.

Inflation rates in the United States and other European countries also rose to multi-decade highs.

Contribution to December 5.4% annual CPI inflation bar chart (percentage points) shows price increases are broad-based, covering goods and services

Economists say higher interest rates will put pressure on the Bank of England to act to show it can control prices and prevent high inflation from becoming what businesses and households see as normal.

Samuel Tombs, UK economist at Pantheon Macroeconomics, said further rate hikes in December left the BoE “with no choice but to raise rates again in February”.

Investors increased their bets on a rate hike by the Bank of England after the inflation data. Markets are now pricing in four rate hikes by November, taking rates to 1.25%.

Most economists expect inflation to rise to at least 6.5% if the government does not act to stop rising energy prices in April, but could hit 6% even if Sunak moves to limit rising bills.

Kitty Ussher, chief economist at the Institute of Directors, said: “It is particularly concerning that this change [in inflation] Mainly from the rise in food prices starting in November. Not only does this provide additional evidence that inflation is becoming endemic rather than temporary, it also augurs well for households facing multiple increases in the cost of living this spring.”

Food price inflation rose to a nine-year high of 4.5%.

Paul Dales, chief UK economist at Capital Economics, said that if gas and electricity prices rose by around 50% in April – and the chancellor did nothing to rein them in – inflation could hit 7%.

Inflation as measured by the retail price index, which underpins interest on index-linked government bonds and student loans, rose to 7.5 percent in December, also the highest in 30 years.

Additional reporting by Adam Samson

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