Inflation defied forecasts by increasing again in February, figures from the Office for National Statistics (ONS), defying the official narrative that the soaring cost of living has been tamed.
While market consensus had expected UK inflation to cool to 9.8% in February, according to FXStreet, prices took a different turn. CPI rose by 10.4% in February from a year before, accelerating from a 10.1% annual rise in January.
Restaurants and cafes, food, and clothing drove the monthly change upwards, according to the ONS. But this was partially offset by downward contributions from recreational and cultural goods and services (particularly recording media), and motor fuels.
The print remained below the recent peak of 11.1% in October, which was the highest annual inflation rate since 1981, according to the ONS.
On a monthly basis, UK consumer prices rose 1.1%, reversing a 0.6% decline in January. However, markets had expected the monthly inflation rate to be just 0.6%.
Moreover, markets had expected core annual inflation, which excludes energy, food, alcohol, and tobacco, to remain unchanged. It picked up to 6.2% in February from 5.8% in January.
This unexpected revival in inflation will cause severe headaches for policymakers. In last week's Budget speech, the chancellor Jeremy Hunt said that inflation had peaked, citing OBR forecasts that CPI will hit 2.9% by the end of the year. "Halving inflation" is one of the government's key aims. The institution actually responsible for that, the Bank of England, is more cautious - in its last meeting the governor Andrew Bailey said that inflation had "turned a corner". It's expecting CPI to fall back to 4% this year than move back to 2% target after that.
Danni Hewson, head of financial analysis AJ Bell, comments that after three months of successive declines the expectation had been for another slight fall in the headline rate, but the “government’s narrative has just suffered a plot twist and it’s a twist that couldn’t have come at a more inopportune moment”.
After all, the Bank of England’s Monetary Policy Committee is holding its second meeting of the year tomorrow, to decide whether to increase interest rates. The Bank is now expected to hike rates from 4% to 4.25%, despite concerns over the fragility of the global financial system in recent weeks.
“Today’s upward shift will be akin to popping a rooster into the henhouse,” Hewson says. “After two weeks of instability on financial markets there had been growing expectation that the Bank of England may take a pause in its rate hike journey, and that can’t be ruled out, but today’s upward shift will be akin to popping a rooster into the henhouse.”
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