Could Red Alert Inflation Push BoE’s Policy?

UK inflation figures climbed to a 10-year high in November as consumer prices continue surging while traders, investors and market participants eye the Bank of England’s crunch monetary policy meeting on Thursday.

The Consumer Price Index rose by 5.1% in the 12 months to November, up from 4.2% in October, which was itself the sharpest incline for a decade and more than double the central bank’s target.

The expected reading was 4.7% for November, and the Bank of England had projected that inflation would hit 5% in the spring of 2022 before moderating towards its 2% target in late 2023. On a monthly basis, UK inflation rose 0.7% in November from October, above a Reuters poll for a 0.4% increase.

Core CPI, which excludes volatile energy, food, alcohol and tobacco prices, rose by 4% year-on-year against a Reuters forecast of 3.7%, and 0.5% month-on-month versus a 0.3% projection.

The Bank of England’s Monetary Policy Committee meets Thursday to decide whether to tighten monetary policy, with inflation surging and the labour market remaining healthy, but the rapid spread of the Omicron variant has cast new uncertainty over the economic recovery on the short term.

As for the interest rates, it is expected to remain at their historic low of 0.1%, but analysts are split on whether it will pull the trigger on rate hikes on Thursday in light of the emergence of Omicron.

For consumers, peak inflation may still be a few months off. Today’s CPI data only serves to increase the pressure on the Bank of England to raise interest rates at its MPC meeting. However, the Bank of England may instead opt to wait until next year given the current uncertainty surrounding the impact of the Omicron variant on the economy, coupled with the risk that further restrictions may need to be introduced before long.

The Office for National Statistics found that inflation rose by 5.1% in the year to November, up dramatically from October’s 4.2% with widespread surging prices across a raft of goods and services, including for fuel, energy, cars, clothing and food.

The latest spike in the UK is likely to build up pressure on the central bank to raise interest rates Thursday, with inflation running at more than double the bank’s target of 2%.
Previous predictions from the Bank of England forecast inflation to surge at around five percent next year but it has already gone ahead of schedule climbing to 5.1 percent according to the Office for National Statistics this morning.

With a target rate of two percent, pressure has been growing on the Bank of England to act with the International Monetary Fund’s warning it, Wednesday, against “inaction bias”.

Former Bank of England Monetary Policy Committee (MPC) member Andrew Sentance told newspapers the inflation news “adds to the case for a rate rise tomorrow”. He said: “If the MPC sits on its hands in the face of such a strong inflation surge, they will look even more out of touch and complacent”.