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The
Office for National Statistics said inflation, as measured by
the consumer prices index, rose to 3% in the year to January, up
from the equivalent 2.5% rate the month before.
The spike, which took inflation further above the bank's target
of 2%, was largely due to increases in airfares, food casts and
private school fees in the wake of the new Labour government's
decision to impose a sales tax.
Economists had anticipated an increase to 2.8% but the scale of
the spike has come as a big surprise and will likely cause
concern among rate-setters at the central bank at a time when
they are voicing worries about about the U.K.'s tepid economic
growth.
Earlier this month, the bank cut its main interest rate by a
quarter of a percentage point to 4.50%, its third reduction in
six months, as it halved its 2025 growth forecast for the U.K.
to 0.75%.
If growth remains that modest, it will be hugely disappointing
news for the U.K.’s new Labour government, which has made growth
its number one mission as it will boost living standards and
generate funds for cash-starved public services. With growth
proving elusive, the party’s popularity has fallen sharply since
its election victory in July.
The government will no doubt be hoping that the central bank
helps it out by cutting interest rates further as it will
contribute to lower mortgage rates and cheaper loans, though
reducing the returns offered to savers.
Most economists think that inflation will rise further in the
coming months as a result of higher domestic energy bills but
start to trend lower in the second half of the year, which will
give -policymakers room to cut interest rates again — but maybe
not as many times as previously thought.
“Another rate cut in March looks pretty unlikely, with the bank
continuing with its gradual pace of easing for now,” said Luke
Bartholomew, deputy chief economist at abrdn, formerly Aberdeen
Asset Management. "But any speeding up of the pace of rate cuts
in the second half of the year will depend on inflation
pressures heading back towards 2%”
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