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U.K. inflation surged more than expected to its highest level in more than a decade in November, adding pressure on the Bank of England to raise interest rates.
Consumer prices rose 5.1% from a year earlier, the most since September 2011, boosted by the cost of clothing, auto fuel and second hand cars. Core inflation, which strips out energy and other volatile items, climbed to 4%, the highest since 1992.
The overall rate of inflation was up from 4.2% in October. It has increased by 3.1 percentage points in the space of just four months, the fastest gain on record.
The reading will present a challenge for BOE policy makers, who are also weighing the risks of the new coronavirus variant to the economy. The central bank had been widely expected to raise borrowing costs on Thursday, but the emergence of omicron has led to speculation a move will now be delayed until the new year.
The pound spiked briefly after the data, before giving up gains to trade 0.1% higher at $1.3248 at 7:42 a.m. in London. Money markets held BOE rate hike wagers steady, betting that concerns over omicron will prompt policy makers to maintain rates on Thursday. They see the central bank raising rates in February.
The reading will be “uncomfortably high for the MPC, but omicron necessitates a little more patience,” said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.
Nonetheless, the jump above 5% comes far sooner than the BOE had expected, with officials only predicting the measure would peak around that level early next year.
What Bloomberg Economics Says…
“Today’s data adds to the case for raising interest rates sooner rather than later. The labor market is tight, and with inflation high, there’s a risk that expectations about future price gains become unanchored. That would open the door to a period of persistent inflation. The strength of recent data means an interest rate rise from the BOE can’t be ruled out on Thursday. But our base case is that the central bank holds off lifting rates, citing uncertainty about the omicron variant.”
Dan Hanson — Bloomberg Economics. Click here for the full REACT
Some forecast even faster gains in 2022. In its regular economic stock-take of the U.K., the International Monetary Fund this week said the rate could hit 5.5% in the spring, as it cautioned the BOE against “inaction bias.”
For policy makers, the worry is that price increases could start seeping into wages, making it harder to bring inflation back to its 2% target. Data Tuesday showed annual pay gains excluding bonus climbed 4.3% in the three months to October.
“It is concerning that inflation is outpacing wages and if this disparity continues to increase as we predict, real household incomes will be squeezed further, dampening consumer spending, and weakening overall economic activity,” said Suren Thiru, head of economics at the British Chambers of Commerce.
The report also showed:
- Retail price inflation, which is used to set interest payments on index-linked bonds and student loan repayments, climbed to 7.1% in November, the fastest pace since early 1991.
- Clothing and footwear prices rose 1.1% in November. That contrasts with a year earlier, when they fell 2.7% as England’s second lockdown led stores to discount prices.
- Petroleum and diesel prices surged 5.1%, and the price of second-hand cars gained 3.1%. The ONS reported a reduced supply of used cars for sale. Demand continues to be fuelled by shortages of new cars linked to a lack of semiconductor chips.
- Factories raised prices by 9.1% in the year to November in response to a 14.3% surge in fuel and raw materials. The increases were the fastest since 2008.
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