UK inflation spikes to a 10-month high, likely to worry the Bank of England

LONDON: Inflation in the UK rose to a 10-month high in January, official figures showed on Wednesday, an increase that will likely diminish expectations of rapid interest rate reductions from the Bank of England.

The Office for National Statistics said inflation, as measured by the consumer prices index, rose to 3% in the year to January, up from the equivalent 2.5% rate the month before.

The spike, which took inflation further above the bank’s target of 2%, was largely due to increases in airfares, food costs and private school fees following the new Labour government’s decision to impose a sales tax.

Economists had anticipated an increase to 2.8%, but the scale of the spike has come as a big surprise and will likely cause concern among rate-setters at the central bank at a time when they are voicing worries about the UK's tepid economic growth.

Earlier this month, the bank cut its main interest rate by a quarter of a percentage point to 4.50%, its third reduction in six months, as it halved its 2025 growth forecast for the UK to 0.75%.

If growth remains that modest, it will be hugely disappointing news for the UK’s new Labour government, which has made growth its number one mission as it will boost living standards and generate funds for cash-starved public services. With growth proving elusive, the party’s popularity has fallen sharply since its election victory in July.

The government will no doubt be hoping that the central bank helps it out by cutting interest rates further as it will contribute to lower mortgage rates and cheaper loans, though reducing the returns offered to savers.

Most economists think that inflation will rise further in the coming months as a result of higher domestic energy bills but start to trend lower in the second half of the year, which will give policymakers room to cut interest rates again — but maybe not as many times as previously thought.

“Another rate cut in March looks pretty unlikely, with the bank continuing with its gradual pace of easing for now,” said Luke Bartholomew, deputy chief economist at abrdn, formerly Aberdeen Asset Management. “But any speeding up of the pace of rate cuts in the second half of the year will depend on inflation pressures heading back towards 2%.”

By RSS/AP