On Wednesday, the inflation report showed that the UK remains the only country in Western Europe where consumer prices are rising at a double-digit pace. Figures reinforced expectations that the Bank of England would have to go in for another interest rate hike in May.
The data showed that the UK consumer price index was 10.1% in March against 10.4% in February. Nonetheless, expectations of a decline to 9.8% failed to come true. For comparison, the euro area inflation is now at 6.9%, while it has dropped to 5.0% in the U.S.
At the same time, the core consumer price index, which excludes volatile food and energy prices, remained unchanged at 6.2%, while prices in the services sector rose by 6.6%.
Over the year, food prices went up by 19.1% to mark the biggest price hike since 1977.
Inflationary pressures in the UK will last longer than in other countries, as it is more dependent on natural gas, with government subsidies helping flatten the price growth curve for a while.
As a result, the Bank of England remains concerned that high inflationary pressures will put an additional burden on the labor market. A double-digit CPI is likely to result in higher wage requirements, thus affecting companies’ pricing strategies. All that could exacerbate the remaining post-pandemic staffing and trade challenges after Brexit.
Given that such soaring prices are more difficult to handle, the Bank of England will almost certainly have to increase the cost of borrowing by at least another quarter of a point.
In April, Huw Pill, Chief Economist at the Bank of England, mentioned that the central bank still needs to push monetary tightening, although he sees some signs of inflationary pressures easing.
In turn, UK Treasury Chief Jeremy Hunt said that the current data from the inflation report confirm the need for further efforts to reduce price pressure on businesses and households.
Investors now expect interest rates to rise by a quarter point, i.e., up to 4.25%, on May 11 following the next BoE meeting, and to reach 5% by September, according to futures markets.
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