City workers in Paternoster Square, where the headquarters of the London Stock Exchange is based, in the City of London, UK, on Thursday, March 2, 2023.
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U.K. inflation unexpectedly remained in double-digits in March as households continued to grapple with soaring food and energy bills.
The consumer price index rose by an annual 10.1%, according to the Office for National Statistics, above a consensus projection of 9.8% in a Reuters poll of economists.
This is a slight dip from the unexpected jump to 10.4% of February, which broke three consecutive months of declines since October’s 41-year high of 11.1%.
On a monthly basis, CPI inflation was 0.8%, above a Reuters consensus of 0.5% and down from the 1.1% of February.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 8.9% in the 12 months to March 2023, down slightly from 9.2% in February but well above expectations.
Core CPIH, which excludes volatile food, energy, alcohol and tobacco prices, rose by 5.7% over the 12 months, unchanged from February’s annual climb — which will be a concern for the Bank of England.
“The largest upward contributions to the annual CPIH inflation rate in March 2023 came from housing and household services (principally from electricity, gas and other fuels), and food and non-alcoholic beverages,” the ONS said in the Wednesday report.
As British households continue to contend with high food and energy bills, workers across a range of sectors have launched mass strike action in recent months amid disputes over pay and conditions.
The ONS said food and non-alcoholic beverages prices rose by 19.2% in the year to March 2023, the sharpest annual increase for more than 45 years.
U.K. Finance Minister Jeremy Hunt said the Wednesday figures reaffirm why the government must continue efforts to drive down inflation.
“We are on track to do this — with the OBR (Office for Budget Responsibility) forecasting we will halve inflation this year — and we’ll continue supporting people with cost-of-living support worth an average of £3,300 per household over this year and last, funded through windfall taxes on energy profits,” Hunt said in a statement.
Bank of England’s tough task
The Bank of England last month hiked interest rates by 25 basis points to 4.25%, and traders are pricing a 72% probability of a further quarter-point hike at the Monetary Policy Committee’s meeting on May 11.
Economists expect the slight decline in the headline figure of March to be followed by a bigger drop in April, due to the base effects of a jump in energy prices in April 2022, when the U.K.’s energy regulator lifted its price cap by 54%.
“While core inflation is likely to prove more stubborn, the squeeze on consumer demand from rising taxes and the lagged impact of raising interest rates should put it on course for a firm downward path by the Autumn,” said Suren Thiru, economics director at ICAEW (Institute of Chartered Accountants in England and Wales).
The U.K. economy was flat in February, as widespread industrial action and the persistent cost of living crisis stymied activity, and Thiru suggested that the MPC may be more divided over whether to hike interest rates further in May, as “concerns grow over a flatlining economy.”
Hugh Gimber, global market strategist at JPMorgan Asset Management, said that, although headline inflation is again heading in the right direction, the central bank is “still a long way from being able to feel comfortable that price pressures are under control.”
“Yesterday’s labour market data provided a stark demonstration of how tight jobs markets are fueling strong wage growth. The feedthrough to today’s inflation print was clear, given the strength in wage-sensitive service sectors,” Gimber said.
U.K. unemployment edged up to 3.8% in the three months to the end of February, new data showed Tuesday, while economic inactivity levels fell and employment rates also rose by more than expected.
“For the BoE, although there are hints of a softening in the tightness of the jobs market, particularly in the continued fall in vacancies, the jobs market remains tight overall,” said Victoria Clarke, U.K. chief economist at Santander CIB.
“The latest report does not deliver the reassurance that the MPC is likely to be looking for that pay growth is moderating down towards rates consistent with the BoE inflation target.”
While stabilizing energy prices will help rein in inflation over the second half of the year, JPMorgan’s Gimber said it is “increasingly evident” that an extended period of depressed economic growth will be needed to rein in core price pressures.
“Another 25 basis point rate hike appears highly likely in May, and the Bank must stand ready to take further action unless economic data shows more definitive signs of cooling,” he said.
“Policymakers have come a long way in their fight against inflation. Going forward, the biggest mistake would be to claim victory prematurely.”
