UK inflation climbed to 6.2% last month, the latest Office for National Statistics figures show, adding pressure on the Bank of England lift interest rates again.
The consumer prices index (CPI) surged in the 12 months to February on the back of soaring fuel, energy and food costs, taking inflation to a 30-year high.
Last week, the Bank of England’s monetary policy committee (MPC) lifted the base rate from 0.5% to 0.75% in response to the high inflation sparked by the re-opening from the pandemic lockdown and exacerbated by the conflict in Ukraine.
CPI inflation over 10yrs
Source: Office for National Statistics
Grant Fitzner, chief economist at the ONS, said the steep jump in February’s inflation came from prices increasing across a wide range of goods and services, from food to toys & games.
Clothing and footwear returned to "traditional" February price rises after last year’s falls when many shops were closed, while furniture and flooring were boosted by new year sales, he said.
“The price of goods leaving UK factories has also been rising substantially and is now at its highest rate for 14 years," he added.
12-month CPI price increases in Feb 2022
Source: Office for National Statistics
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, noted that the 6.2% increase in prices was up from 5.5% a month before and higher than the 6% consensus estimate.
“February’s CPI inflation rate is at the top end of the range expected by the MPC — ‘around 6%’ — at last week’s meeting, and the near-term outlook clearly is extremely uncomfortable for the committee,” Tombs said.
“But with the economic recovery likely to slow sharply as households feel the pinch, and domestically-generated inflation still relatively subdued, we expect the committee to pause raising bank rate, once it has increase it to 1% in May.
“Further rate hikes would increase the risk of a recession and the chances that CPI inflation ultimately would significantly undershoot the 2% target in the medium term.”
Pantheon Macroeconomics expects CPI inflation to rise to about 6.5% in March, driven primarily by the recent jump in motor fuel prices, and then to peak at 8.5% in April.
However, Bestinvest managing director Jason Hollands said the market is factoring in UK interest rates of 2% by the end of 2022, which would put pressure on investors’ portfolios – especially those with bonds.
“Beating inflation should be a key objective for long-term assets. In this respect, equities offer far greater potential than bonds,” he said.
“Ten-year gilts are currently yielding 1.7%, so are negative in real terms once adjusted for inflation. UK equities offer a healthy yield premium over bonds – with the dividend yield on the UK market expected to be circa 4% over the coming year – as well as potential capital returns.
“Within the spectrum of equities, there is a good case for owning dividend generating funds as these provide an element of predictability providing pay-outs are sustainable, as well as holding companies that have strong pricing power, which can pass on cost increases to their customers without taking a hit on their margins.”