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UK braced for another jump in inflation

Inflation could officially rise on Wednesday for the second consecutive month in what would be a further blow to Rishi Sunak’s claim that the UK economy has “turned a corner”.

The Office for National Statistics (ONS) will publish January’s inflation data tomorrow morning and analysts expect the rate to jump from 4 per cent to 4.1 or 4.2 per cent.

Some mortgage lenders have in the past few days increased their prices after months of cuts, with one broker suggesting they were “pricing in potential inflation rises”.

The prime minister entered Downing Street in October 2020 promising to halve inflation by the end of last year; a target that he met.

But inflation, or rising prices, looks to be increasing again and although the rate is less than half of what it was at its peak of 11 per cent, it remains more than double the Bank of England’s target of 2 per cent.

As recently as Monday, Mr Sunak said that the economy was “heading in the right direction” but another jump in inflation would seriously undermine his claim.

And separate data to be published on Thursday could show that the UK has entered a recession after gloomy figures released last month showed that retailers suffered a dire Christmas as families cut back on spending amid the cost of living crisis.

When inflation unexpectedly rose in December – the first jump in some 10 months – the ONS said the rise had been driven by rising tobacco and alcohol prices.

The cost of living is expected to have continued rising in January (PA Wire)
The cost of living is expected to have continued rising in January (PA Wire)

Fears have also been growing that attacks in the Red Sea, which serves as the entry point to the Suez Canal, one of the world’s busiest shipping lanes, could drive up the price of oil and gas.

The attacks on container ships by Iran-backed Houthi rebels in Yemen has forced some firms to divert vessels around Africa rather than using the Suez Canal to travel between Europe and Asia, adding transport costs and time delays.

Retailers and supermarkets have recently warned about the impact of this on stock shipments and costs if the disruption continues.

Another rise in inflation would also serve as a bad omen for homeowners, with millions of people across the country having seen their mortgage costs increase in recent months.

Nationwide, the country’s biggest building society, revealed its mortgage rates would rise by up to 0.25 percentage points on Tuesday. It comes after lenders Halifax and TSB said they were also raising rates on some of their products.

But not all lenders have hiked their prices. Santander announced mortgage rate cuts of 0.16 percentage points.

“Lenders at the moment are pricing in potential inflation rises,” Ken James, director at Contractor Mortgage Services, told The Independent.

Bank of England governor Andrew Bailey has to try and hit target inflation of 2 per cent (PA Wire)
Bank of England governor Andrew Bailey has to try and hit target inflation of 2 per cent (PA Wire)

“I think what they are doing is safeguarding. They are saying ‘we think that everything is going to rise with all these figures coming in and therefore let’s partly protect ourselves against that future rises and get it in early’.”

He added: “I think with tomorrow, because I’m pretty confident rates are going to rise with inflation, I think lenders have just done it early, I think they are just protecting themselves.”

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said he believes the data will show that inflation hit 4.1 per cent in January but that he expected it to fall back to 3.4 per cent in February.

Economists will be tracking the data to try to figure out what influence it might have on the Bank of England, whose Monetary Policy Committee (MPC) is tasked with keeping inflation as close to 2 per cent as possible.

One of the main levers it has with which to do this is changing interest rates.

If inflation is higher than the 4.1 per cent the MPC expected in its last forecast, that could make rate setters more likely to delay cuts to the base rate.

The higher than expected wage rises in Tuesday’s ONS figures will also spark worries of delays to base rate cuts. Wage rises also tend to push up inflation.

“Today’s wage rises contribute to tomorrow’s spending power, impacting demand and influencing inflation, so the Bank will be keenly monitoring average earnings growth in particular,” said Rob Morgan, chief investment analyst at Charles Stanley.