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Bank of England target never been further out of reach as inflation accelerates to 30-year high

The Bank of England has never been further away from its legal inflation target, revealed official figures released today.

Spiralling inflation has heaped further criticism on the Bank’s decision to keep rates at record lows while UK inflation was taking off after the country emerged from the most onerous Covid-19 restrictions.

The cost of living hit its highest level in nearly 30 years in December, accelerating to 5.4 per cent, smashing the City’s expectations.

That is the hottest rate the consumer price index has reached since the Bank adopted it as its inflation targeting measure in 2003.

Former Bank rate setter, and senior advisor to Cambridge Econometrics, Andrew Sentance told City A.M. the Bank “has been slow to respond to this inflationary threat. Further interest rate rises will be needed this year and next to bring inflation back on track.”

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The Bank “will be playing catch-up this year,” he added.

Threadneedle Street has a legal requirement to keep inflation at two per cent, meaning today’s figure is nearing triple that goal.

Worryingly, the Bank is unlikely to get anywhere near its legal requirement anytime soon.

Most expect the rate of price rises to hit seven per cent in April, led higher by the energy price cap adjustment taking effect.

Inflation “will stay above four per cent for all of this year and will remain above the two per cent target until April 2023,” Paul Dales, chief UK economist at Capital Economics, warned.

Responding to a grilling by MPs on the Treasury Committee, Bailey said the central bank will do everything “to keep inflation under control”.

The elevated inflation reading ignited a flurry of top City economists placing bets on the Old Lady hiking interest rates for the second time in as many months at its next meeting on 3 February.

James Smith, developed markets economist at ING, said: “Inflation has surprised higher (again) and that’s only likely to increase the temptation for Bank of England policymakers to hike rates for a second consecutive meeting this February.”


Source: City AM

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UK inflation to remain more than double BoE’s target for entire year

UK inflation will run at more than double the Bank of England’s two per cent target for a whole year, reveals fresh forecasts published today.

The rate of price increases will peak at 6.7 per cent this April, lifted higher by the energy bill cap being hoisted around 50 per cent, according to investment bank BNP Paribas.

October’s 2021 official inflation rate hit 4.2 per cent. BNP Paribas predict the rate will not fall below four per cent until November this year, meaning the cost of living will remain at least double the Bank’s target for an entire year.

Inflation does not fall back to the Bank’s target until April next year under the investment bank’s forecasts.

Soaring wholesale gas prices triggered by an energy crunch in Europe, compounded by supply chain breakdowns and a tight labour squeeze has propelled inflation in the UK to historically high levels.

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The cost of living is already running at its hottest rate in over a decade, hitting 5.1 per cent in November, according to the Office for National Statistics.

Households are set to be squeezed by inflation eroding real incomes and the Bank hiking rates rapidly in response to the rapid cost of living increase.

Consultancy Capital Economics is pricing in four rate hikes in 2022, taking borrowing costs 1.25 per cent, the highest level since February 2009.

The predictions come as the International Monetary Fund warned yesterday emerging market economies need to prepare for potential currency fluctuations and financial market volatility triggered by the world’s top central banks tightening policy sharply this year.

The Bank will announce its next decision on interest rates on February 3. Last month, the central bank raised rates for the first time in over three years, lifting them 15 basis points from a record low 0.1 per cent.


Source: City AM

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UK inflation surges, fuels expectations interest rates will rise

UK inflation surged to a 10-year high last month, fuelled by a jump in household energy bills and petrol prices, official data show.

Annual UK consumer prices index inflation surged to 4.2% in October, from 3.1% in September, and is now more than double the target set for the Bank of England by the Treasury.

While a sharp rise in inflation had been expected, with economists in a poll by Reuters having projected an October reading of 3.9%, the jump was even greater than expected and fuelled expectations of a rise in UK base rates from a record low of 0.1% next month.

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Colin Dyer, client director at financial services group abrdn, said: “Rising fuel and energy prices, paired with global supply chain disruptions, caused inflation to soar last month after a temporary respite in September.

“The cost of living has been increasing rapidly for much of 2021 because of the strong economic recovery from the coronavirus pandemic, but October’s inflationary rate is the highest we’ve seen in over a decade. And with the Bank of England now warning of it exceeding 5% early next year, it’s likely to remain an uncertain and uncomfortable period for many.”

He added: “For those trying to save, rumours of a rate rise on the horizon might seem positive, but this is unlikely to be substantial enough to show any real returns.”

By Ian McConnell

Source: Herald Scotland

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Inflation declines in September

Inflation slowed unexpectedly in September as the Bank of England is set to tackle the acceleration by hiking interest rates.

Consumer Prices Index (CPI) rose 3.1 per cent in the year to September, down from 3.2 per cent to August, official data showed.

Increased prices for transport were the largest contributor to price rises, at 0.91 percentage points, according to the Office for National Statistics.

Restaurants and hotels made the largest downward contribution to the change in the inflation rate. This was because the government’s Eat Out to Help Out hospitality meal discount scheme of August 2020 dropped out of the annual comparison.

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The Bank of England said last month that expected inflation to rise slightly above 4 per cent in the last quarter of 2021.

Mike Hardie, head of prices at the ONS, said: “However, this was partially offset by most other categories, including price rises for furniture and household goods and food prices falling more slowly than this time last year.

“The costs of goods produced by factories rose again, with metals and machinery showing a notable price rise. Road freight costs for UK businesses also continued to rise across the summer.”

On a monthly basis, CPI increased 0.3 per cent in September 2021, compared with an increase of 0.4 per cent in September 2020.

Businesses have warned of inflationary pressures with energy prices rocketing in recent weeks.

By Emily Hawkins

Source: City AM

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UK inflation hits 2.5% in June, ONS has revealed

UK inflation jumped again in June, outpacing economists’ expectations to accelerate away from the Bank of England’s target, the Office of National Statistics (ONS) revealed this morning.

The Consumer Price Index (CPI) rose to 2.5 per cent last month, its highest level since August 2018, up from 2.1 per cent in May. Analysts had forecast a rise of 2.2 per cent.

On a monthly basis, the CPI rose by 0.5 per cent in June 2021, compared with a rise of 0.1 per cent in June 2020.

Once again, the ONS said that the largest single factor pushing inflation upward was transport costs such as fuel, as well as higher prices for clothes, food and footwear.

The figures come a day after it was revealed that US inflation had rocketed to 5.4 per cent.

The Labour Party said that the rise was because firms were struggling to access critical supplies and were also handling a shortage of staff.

Shadow Chief Secretary to the Treasury Bridget Phillipson said: “The Government must do all it can do to keep materials and other supplies moving to prevent shortages, including cutting the unnecessary red tape following the EU-UK agreement, and providing much better training so that we have access to the skills we need here in the UK.

“Longer-term, Labour’s plan would mean we buy, make and sell more in the UK, protecting our access to critical supplies through better use of procurement and efforts to bring more production here.”

Last week outgoing Bank of England chief economist Andy Haldane said that inflation was on track to hit 4.0 per cent – double the Old Lady’s target.

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Commenting on this morning’s rise, KPMG’s chief economist Yael Selfin said inflation would likely peak at 3.0 per cent this year.

“The prospects of cooling inflationary pressures next year, as firms adjust to new levels of demand, should provide the Bank of England with room to keep interest rates unchanged for a while longer”, she said.

Jason Hollands, managing director of Bestinvest: “That prices are continuing to rise as economies bounces back from last year’s brutal contraction is little surprise, especially when there are supply bottlenecks that have built up during the lockdowns.

“Where the jury remains out though is whether the surge is a temporary effect or could lead to a more persistent problem if economies are allowed to overheat fuelled by unprecedented levels of both monetary and fiscal stimulus.”

Joseph Little, global chief strategist at HSBC Asset Management said that though inflation would likely continue to increase this year, it would be a temporary bump.

“We expect inflation pressures to continue building over the course of the year driven by base effects and the service sector’s reopening, higher energy prices and general supply-demand imbalances.

“The bulk of these transitory factors should unwind over the course of 2022, pushing inflation back towards the Bank of England’s 2 per cent target.”

By Edward Thicknesse

Source: City AM

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UK inflation doubles in April as lockdown restrictions ease

UK inflation has more than doubled in April as energy and clothes prices pushed the consumer price index up to 1.5% amid the easing of lockdown restrictions.

A rise from March’s 0.7% readout, the figure comes more in line with the Bank of England’s expected rate of 2% by the end of the year.

Statistics published by the Office for National Statistics (ONS) identified rising household utility, clothing and motor fuel prices as the biggest drivers of the increase which was still partially offset by a large downward contribution from recreation and culture.

Gas and electricity saw big jumps with price rises of 9.4% and 9.1% respectively between March and April driven by a spike in global demand for wholesale gas.

A bounce in oil prices from $20 per barrel last year to around $70 today also put pressure on inflation and will continue to do so as demand increases as the global economy opens up again.

Ambrose Crofton, global market strategist at JP Morgan Asset Management, said that “a confluence of factors including Brexit-related trade frictions, rising commodity and freight prices are adding cost-push pressure” to the manufacturing side of the economy.

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End of furlough scheme could keep inflationary pressures at bay

Inflation is likely to increase further throughout the year as “the economy gradually reopens, the recovery picks up steam and supply constraints intensify in the sectors that were hit by the pandemic,” according to Silvia Dall’Angelo, senior economist at the International Business of Federated Hermes.

Dall’Angelo said higher wholesale gas prices could lead to hikes in regulated utility prices later in the autumn, pushing CPI inflation close to 3%.

But she notes that as inflationary drivers are “set to be largely cost-push and hence temporary” with residual disruption to the labour market likely to show up at the end of the furlough scheme in September, underlying inflationary pressures could be contained.

Economic recovery could be a Trojan horse for inflation

However AJ Bell financial analyst Laith Khalaf said that “at current levels, UK inflation is nothing to fret about, but there is rising concern that the fiscal and monetary response to the pandemic has sown the seeds of an inflationary scare further down the road.”

The Bank of England showed no signs of tightening the reins just yet as it announced it would make no changes to monetary policy earlier this month with interest rates remaining at 0.1% for now despite its improved economic forecasts.

Khalaf said: “For the moment, the Bank of England is dismissing consumer price increases as a natural bounce back from the depths of the pandemic last spring. But the economic recovery could be a Trojan horse, smuggling inflation into the UK, right under the nose of central bankers.”

Khalaf noted that inflationary fears are already starting to creep into the market with the 10-year gilt yielding 0.9%, up from 0.2% at the beginning of the year.

Despite this Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson, notes real yields “remain very negative as guidance about interest rates continues to hold down nominal yields, even in the face of expected strong growth and rising inflation”.

“While breakeven rates on UK gilts are towards the upper end of where they have been over the last two decades, it is not clear that they are at a level that should be unduly concerning for the Bank yet.”

By Harriet Habergham

Source: Portfolio Adviser

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