UK inflation jumped to its highest level in nearly three decades in December, adding pressure on the Bank of England to raise interest rates again.
According to figures released on Wednesday by the Office National Statistics, consumer price inflation rose to 5.4% from 5.1% in November, coming in above consensus expectations of 5.2% and well above the BoE’s 2% target. The last time inflation was higher was in March 1992, when it was 7.1%.
Core CPI inflation – which strips out volatile elements such as food and fuel – increased to 4.2% in December from 4.0% the month before, coming in above consensus expectations of 3.9%.
Meanwhile, the retail price index rose to 7.5% from 7.1% in November – its highest level since 1991. Analysts had been expecting 7.1%.
Grant Fitzner, chief economist at the ONS, said: “Food prices again grew strongly while increases in furniture and clothing also pushed up annual inflation.
“These large rises were slightly offset by petrol prices, which despite being at record levels were stable this month, but rose this time last year.
“The closures in the economy last year have impacted some items but, overall, this effect on the headline rate of inflation is negligible.”
The BoE’s next policy meeting is on 3 February. At the last meeting in December, the Bank hiked rates for the first time since the onset of the Covid pandemic, by 15 basis points.
Capital Economics said: “It’s no secret that inflation is going to rise even further. The increases in producer prices already seen have yet to fully filter through into consumer prices. And the surge in wholesale gas and electricity prices could result in an increase in utility prices on 1st April in the region of 50%. Those effects would be enough to push up CPI inflation to 7.0% in April. That would be higher than the peak of 6% that the Bank of England was forecasting when it raised rates in December.
“And although inflation will fall back thereafter, we think it will stay above 4% for all of this year and won’t drop to the 2% target until April 2023. That’s why we think the MPC will raise interest rates faster than most expect this year, from 0.25% to 1.25%, with the next hike to 0.50% coming on 3rd February.”