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The UK’s current inflation rate surpassed the 5.2% expectation of economists, ahead of the BoE’s next meeting in February.
The inflation rate in the UK spiked to 5.4% in December, its highest level since March 1992. Factors that affected the surge include higher energy costs and several issues plaguing the supply chain.
The recorded increase, which has led to a sustained rise in consumer price index (CPI), even surpassed analysts’ expectations. The initial consensus was that the inflation rate would be 5.2%, a slight uptick from the 5.1% recorded in November. However, consumer prices rose by 0.5% on a monthly basis, which turned out to be substantially higher than economists’ projections of 0.3%.
Due to the increase in living costs, there are growing expectations that the Bank of England might raise interest again. In fact, all eyes will be on the Monetary Policy Committee’s next meeting on February 3rd. This is because British policymakers are deliberating increasing interest rates following December’s 15-basis point 0.25% increase. In the same month, the Bank of England also became the first major bank to announce a hike in rates from pandemic-era lows.
The BoE Has Some Very Pivotal Decisions to Make Owing to Prevailing Circumstances
According to Paul Craig, portfolio manager at Quilter Investors, the situation presented in December justified the BoE’s decision to raise rates. However, Craig added that the jury is still out on the outcome of the meeting in February. In his own words:
“The MPC will be faced with a difficult trade-off between ensuring financial stability or helping households cope with a cost of living crisis that is set to squeeze household finances over a difficult winter period. It’s not just the cost of living that is increasing, so is the cost of going to work, and wage increases may not be enough to cover the cost of returning to normality.”
Amid all this, the Bank of England also has to weather some challenges posed by the labor market. This is because employment remains below its pre-pandemic level, and vacancies tracking is sky-high.
According to a recent report from the Office for National Statistics, the annual wage growth for last month was 3.8%. This strongly implies that there is a pervading pay decline across the board. As a result of this, Craig believes that real poverty stemming from reduced work pay may be on the rise.
UK Stock Markets Seemingly Unaffected by Inflation Jump
On the security trading front, the UK stock markets do not seem weakened by the hike in inflation. As of press time, the FTSE 100 and FTSE 250 indices continued to function unencumbered. Russ Mould, investment director at stockbroker AJ Bell, thinks there might be a reason for this. According to him, “ongoing weakness among tech-related stocks was offset by strength in housebuilders, retail and oil producers in the FTSE 100.”
Mould also said that the Brent Crude recently hit $87.84 per barrel, which represents a 0.4% gain. Furthermore, this may suggest a return to $100 per barrel for the commodity.