UK Inflation Soars To 10-Month High In January

UK inflation surged to its highest level in 10 months in January, reaching a 3% increase compared to a year earlier. This marks a notable acceleration from the 2.5% pace recorded in December, as reported by the Office for National Statistics on Wednesday. The rise, which outstripped economists’ and the Bank of England’s (BOE) forecast of 2.8%, was primarily driven by higher food prices, increased airfares, and the introduction of value-added tax (VAT) on private school fees.

The latest inflation data is expected to impact the BOE’s cautious stance on interest rate cuts aimed at supporting the sluggish economy. While BOE Governor Andrew Bailey has downplayed the immediate threat of inflation surging this year, officials have warned of the potential for “second-round effects” that could keep underlying price pressures elevated for a prolonged period. The central bank has projected inflation to reach 3.7% by the third quarter, largely due to rising energy costs.

Price growth in the services sector, closely monitored by the BOE for signs of domestic inflationary pressure, accelerated to 5% in January from 4.4% in December. Although the BOE had anticipated a 5.2% increase, this uptick in services inflation suggests that the economy may face prolonged price pressures. The pound pared its gains following the report, hovering at $1.2616.

The latest figures push inflation further away from the BOE’s 2% target, and further increases are expected in the coming months, largely driven by rising energy bills. Cornwall Insight, an energy consultancy, forecasted a third consecutive rise in the energy price cap in April, meaning households will face another hike in gas and electricity prices.

Earlier this month, the BOE reduced interest rates for the third time since August but emphasized that any further cuts would be “gradual and careful.” Money markets are currently pricing in only two additional rate reductions this year, bringing rates down to 4%.

The case for a cautious approach was reinforced by recent data showing an uptick in wage growth, which reached an eight-month high in the fourth quarter. The jobs market also demonstrated resilience, with tax data revealing an increase in payrolled employees in January. Despite recent changes to national insurance rates and the minimum wage, employment figures have remained largely stable, with a decrease of fewer than 20,000 jobs.