Inflation was revealed to have hit 5.1 per cent today, but the Bank of England remains unlikely to intervene with an interest rate hike tomorrow, according to analysts.
British households and businesses face faster than expected price rises as inflation continues to beat forecasts, ONS figures showed.
The BoE’s Monetary Policy Committee will make its interest rates decision on Thursday, but has previously indicated it will hold off on hiking – opting instead to collect more data on the economic impact of the Omicron variant of Covid-19.
However, as economic growth slows, the bank now faces rising fears of stagflation and a stark warning from the International Monetary Fund, which recently urged the BoE and the Treasury to get a grip on the soaring cost of living.
Under pressure: The Bank of England will make a decision on interest rates on Thursday
UK CPI hit 5.1% in November, surpassing Bank of England forecasts amid warnings that it could move even higher
The IMF expects UK inflation could hit 5.5 per cent in spring – well above the bank’s 2 per cent target – and it told the BoE to beware of ‘inaction bias’ when deciding whether to finally bring interest rates above their current rock-bottom level of 0.1 per cent.
That level was introduced as an emergency measure at the start of the Covid crisis before the UK’s initial lockdown – and a much clearer picture now exists of how Britain has weathered the storm and were the current challenges are.
One of those is a serious inflation crunch hitting people’s finances.
Jane Tully of the Money Advice Trust, which runs the National Debtline and Business Debtline, said there is mounting evidence of the rising cost of living starting to bite for many British households.
She said: ‘We are seeing the impact of stretched household budgets, where the amount coming in is not enough to cover essential costs like energy, rent and in some cases food.
‘As these essential household costs continue to rise, these challenges will only become harder for many people this winter.’
As the Office for National Statistics revealed CPI inflation jumped to 5.1 per cent in November, fixed income investment manager at Aegon Asset Management, James Lynch said: ‘this will not sit easy with the policymakers’ at the BoE, particularly in the context of a stronger-than-expected labour market.
He added: ‘Given this is the type of data MPC members were focusing on to make the call to raise interest rates at the 16 December meeting, a policy move should have been all but a foregone conclusion.
‘The only reason a move is now not going to happen…[is the perception of] the value in waiting to see how the Omicron wave of infections affects government policy and economic activity in January.
‘The reality is, it should not be a medium or long-term consideration for inflation, if anything it may add to the inflation problem we already have.’
However, personal finance expert at investing platform Bestinvest Adrian Lowery said that while the emergence of the Omicron variant has ‘made an imminent hike less likely’, the most recent inflationary surge ‘could bring out a couple of the inflation hawks on the MPC to vote for a small rate rise’.
He added: ‘Either way real interest rates for savers will remain resoundingly negative for the foreseeable future.
‘Investors are also seeing their returns eroded at the moment but equities and other investments provide the only reasonable expectation of maintaining the real value of one’s savings.’
What is driving inflation?
While clothing and food prices contributed significantly to the most recent uptick in prices, the soaring cost of energy and fuel continues to be the most notable impact.
Energy prices have shot up globally in response to booming demand in the face of short supply, exacerbated by ongoing supply chain issues.
This is a key factor for those who see a Bank of England rate rise as a token move in the face of inflation driven by outside forces.
And chief commodities analyst at Nordic corporate bank SEB, Bjarne Schieldrop, suggested inflationary pressure from energy prices could begin to abate at the start of next year.
He explained: ‘While Omicron fear has clearly receded, earlier expectations of a one-way-street to global economic revival has been postponed. Q1 2022 is likely to be more muted than expected in terms of oil demand and oil prices.
‘The Brent crude tailwind from ultra-high natural gas prices is likely to fade in March 2022, as natural gas prices fall back from current extreme winter-risk-fear levels, as seen in Asia.
‘This could be a precursor to softer natural gas prices in Europe.’
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