UK inflation jumps to 10.4% as cost of living crisis intensifies – business live

Key events

The odds of a rise in UK interest rates tomorrow has jumped sharply, after inflation jumped to 10.4% in February.

The money markets are now indicating a 95% chance of a quarter-point rise tomorrow, with a small possibility of a half-point increase in Bank Rate (which is currently 4%).

At the end of last week, when the banking crisis was raging, the markets indicated the Bank was evenly split beween a quarter-point increase, and leaving rates on hold.

But the sight of inflation roaring in double-digit levels is likely to spur some BoE policymakers to vote to hike borrowing costs again at this week’s meeting (decision due at noon tomorrow).

Suren Thiru, economics director at ICAEW (the Institute of Chartered Accountants in England and Wales) is urging the Bank of England to resist raising interest rates tomorrow.

Thiru argues that inflation will drop this month, as we catch up with the jump in prices in March 2022 after the full-scale invasion of Ukraine:

“This surprising rise in inflation highlights the continued crisis facing households and the damaging squeeze on firms’ ability to invest and operate at full capacity.

Inflation should resume its downward trajectory in March, when the strong base effect from the comparison to March 2022 – when Russia’s invasion of Ukraine sent fuel prices skyrocketing – is expected to lower the headline rate.

While inflation remains a key risk, we would caution the Monetary Policy Committee against raising interest rates this week given the fragility in financial markets.

Pushing ahead with raising rates in the current climate would risk further market turbulence and weaken our economic prospects.”

We’ll find out the Bank’s decision at noon tomorrow…

Pound jumps after inflation surprise

Sterling is rallying on the foreign exchange markets, after inflation jumped unexpectedly to 10.4% in February.

The pound has gained half a cent against the US dollar today to $1.226, and almost half a eurocent against the single currency to €1.139.

Traders will be calculating that the Bank of England is more likely to raise interest rates higher, as soaring inflation turns up the heat on the central bank.

Alberto Gallo, CIO of Andromeda Capital Management, warns that the Bank of England appears to be stumbling in the fight against inflation.

Core inflation rises to 6.2%

Core inflation, which strips out food, energy, alcohol and tobacco, rose last month too – which will not please the Bank of England.

Core CPI rose to 6.2% in February, up from 5.8% in January, a sign that inflationary pressures are building in the economy.

Rising clothing prices pushed up inflation

Increased prices for womens clothing also pushed up UK inflation last month, with prices rising more in February than a year ago.

Prices of clothing and footwear rose, overall, by 8.0% in the year to February 2023, up from 6.2% in the year to January 2023

Prices usually rise between January and February as new stock starts to enter the shops as retailers end their January sales – but the 2.5% rise in 2023 is the largest observed between January and February since 2012.

The ONS says:

The upward effect on the change in the headline rate between January and February 2023 was principally from women’s clothing, where prices rose by more this year than a year ago.

Here’s ONS chief economist Grant Fitzner on the surprise rise in inflation last month:

“Inflation ticked up in February, mainly driven by rising alcohol prices in pubs and restaurants following discounting in January.

“Food and non-alcoholic drink prices rose to their highest rate in over 45 years with particular increases for some salad and vegetable items as high energy costs and bad weather across parts of Europe led to shortages and rationing.

“These were partially offset by falls in the cost of motor fuel, where the annual inflation rate has eased for seven consecutive months.”

Food price inflation at 45-year high amid vegetable crisis

UK food and non-alcoholic drinks prices rose at the fastest rate in 45 years, the inflation report shows, driving up the cost of living.

Food and non-alcoholic drink inflation jumped to 18.2% in the year to February 2023, up from 16.8% in January, the ONS says.

Data modelling suggests the rate would have last been higher in August 1977, when it was estimated to be 21.9%.

A graph showing UK inflation Photograph: ONS

Vegetable prices rose by 18% in the year to February 2023, the highest rate since February 2009.

The shortages of some fruit and vegetables in the shops last month may have driven up prices.

The ONS says:

The largest upward effect came from vegetables, where prices rose in the month to February 2023 by more than a year earlier.

There have been media reports of shortages of salad produce and other vegetables, reportedly because of bad weather in southern Europe and Africa, and the impact of higher electricity prices on produce grown out of season in greenhouses in the UK and northern Europe.

The annual inflation rates for bread and cereals, chocolate and confectionery, other food products (principally ready-meals and sauces) and hot beverages were each the highest since at least 2008.

Prices at hotels and restaurants jumped at the fastest rate since the summer of 1991 in February.

The annual inflation rate for restaurants and hotels was 12.1% in February 2023, up from 10.8% in January.

That, the ONS says, is the highest rate since July 1991.

First rise in UK inflation in four months

This is the first rise in UK inflation in four months, and pushes CPI towards the 41-year high of 11.1% set in October 2022.

UK inflation to February 2023 Photograph: ONS

On a monthly basis, consumer prices rose by 1.1% in February 2023, compared with a rise of 0.8% in February 2022.

That was driven by higher prices in restaurants and cafes, and for food, and clothing.

Newsflash: UK inflation jumped to 10.4% in February

UK inflation has jumped unexpectedly, in a blow to households.

Consumer prices rose by 10.4% in the year to February, the Office for National Statistics reports, up from 10.1% in January.

The ONS says the largest upward contributions to inflation came from housing and household services (principally from electricity, gas, and other fuels), and food and non-alcoholic beverages.

Economists had forecast a drop to 9.9%, so this is a surprise to the City.

This leaves inflation sharply higher than the Bank of England’s target of 2% – giving policymakers something to ponder before they set UK interest rates tomorrow.

Adam Cole of RBC Capital Markets predicts annual UK inflation will have eased to 9.8% in February, as we catch up with price rises last spring.

Cole explains:

From March, the combination of last year’s lifting of Covid restrictions and large price increases for energy and food mean that base effects begin to really dominate.

Mohamed El-Erian, economic adviser to Allianz, predicts that UK inflation is going to continue to come down.

Speaking to Radio 4’s Today programme, El-Erian predicts:

So we’re going to say goodbye to the high of over 11%.

We’re going to come into single digit either today or next month and we’re going to head all the way down to 4%, and then get stuck there.

Introduction: UK inflation report and Fed decision in focus

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The cost of living squeeze is in focus on both sides of the Atlantic today.

In the UK, inflation is expected to fall when the latest consumer prices index data is released at 7am.

The annual CPI index is expected to have risen by around 9.9% in February, down from 10.1% in January. That would be the lowest reading since last August, and a welcome return to single-digit inflation.

However, falling inflation does not mean that prices are falling – simply that they are rising less quickly (compared to a year ago).

Yesterday, chancellor Jeremy Hunt warned the House of Lords Economic Affairs committee that inflation was “dangerously high”, at over 10% adding “we need to do everything we can to maintain our focus on bringing it down.”

Falling inflation would please the Bank of England, which will release its decision on UK interest rates at noon tomorrow.

Today, though, it’s the US central bank’s turn to set borrowing costs.

Before the banking crisis blew up this month, the US Federal Reserve had been expected to hike interest rates by a half of one percent, another large increase. But with three US banks having failed in the last few weeks, the Fed may be more cautious.

Economists broadly expect a quarter-point increase from the Fed tonight (the decision is 6pm UK time, or 2pm in New York). But they could surprise Wall Street by holding borrowing costs…

Naeem Aslam, chief investment officer at Zaye Capital Markets, explains:

Heading into the meeting, the Fed is expected to raise interest rates by 25 basis points, which is still much lower than when Jerome Powell, the Fed Chairman, delivered his statement to Congress a few weeks ago.

Traders began pricing in a 50 basis point interest rate rise for today’s meeting at the time. Yet, the crisis in US regional banks has caused traders to reconsider their views, and the broad belief today is that the Fed will take its foot off the gas pedal.

We’ll hear from Fed chair Powell tonight too, and gauge how concerned he is about the banking crisis, and the economy…

• 7am GMT: UK inflation report for February released

• 7am GMT: UK PPI report of producer price inflation released

• 9.30am GMT: UK house price index

• 2.15pm GMT: UK Treasury committee to quiz the independent Office for Budget Responsibility (OBR) on the budget

• 6pm GMT: Federal Reserve decision on US interest rates

• 6.30pm GMT: Fed chief Jerome Powell holds press conference