The UK's inflation figures are awful – and the worst is yet to come

UK inflation has hit yet another 30-year high, and we still haven’t hit the peak. This string of nasty surprises puts even more pressure on the Bank of England to raise interest rates, says John Stepek.

Man shopping in a supermarket
Inflation in the UK hit yet another 30-year high in March.
(Image credit: © Getty Images)

Wow. What an awful number.

Inflation in the UK hit yet another 30-year high in March.

And the worst is yet to come. We haven't even had this month's jump in the energy price cap added into the mix.

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So what does that mean for your money – and interest rates in particular?

The latest inflation figures are awful

UK inflation figures for March came out this morning and they made for terrible reading, whichever figure you want to use.

First, the consumer price index (CPI) measure. This is the one that the Bank of England is meant to maintain in the region of 2%, give or take a percentage point, using its vast powers of foresight and its near-omnipotent monetary policy toolbox (I know, I know, sarcasm is the lowest form of wit, but you don't pay for the jokes).

Anyway, CPI is now rising at an annual rate of 7%. That's quite a bit more than 2%, as I'm sure you'll agree.

What about the other measures? Well, under the retail price index (RPI) measure - which is deemed to be an unfit statistical measure, but has a much longer active history than CPI, and is also still used for calculating unimportant things like student loan repayments and (for now) the interest on index-linked government debt – inflation is rising at 9% a year.

And if you use RPIX – which is RPI minus mortgage interest costs, and which used to be the Bank's target up until 2003 (the target was a bit higher, at 2.5%) – it's sitting at 9.1%.

So all in, inflation is rising at a very rapid rate indeed. For perspective, imagine getting an interest rate of 9.1% on your savings. You laugh, but at this rate of inflation, that's what you need to get just to stand still.

(Also, last time RPIX was this high, back in December 1990, the Bank of England interest rate was sitting above 13%. That might leave you feeling queasy if you hold a mortgage and/or envious if you have lots of savings).

Worse still, inflation in the UK is still beating expectations. Markets yesterday took a dash of comfort from the fact that in the US, core inflation was a bit lower than investors had predicted. But the UK just keeps knocking it out of the park in terms of blowing through forecasts.

As Ruth Gregory of Capital Economics points out, this was the "sixth upside surprise in as many months".

Why the Bank of England will have to raise interest rates

The Bank of England (and they're not the only ones) will be hoping that April marks the peak for inflation. That's partly because the April figure will include the 54% jump in the energy price cap, which alone, says Gregory, will add 1.6 percentage points to inflation. That would give you a CPI reading closer to 9%.

However, the fact that inflation keeps surprising on the upside, and more importantly, that it keeps surprising the Bank of England, means that there's now a lot of pressure on the Bank to be more aggressive on interest rates.

People keep asking me how hiking interest rates will help here. And it's a good question.

If by "help", you mean, "bring down energy prices", then I'm afraid to say that it won't. And rising rates of course makes debt more expensive, which means higher mortgage rates and higher borrowing costs for businesses.

All of that chokes off demand, at a time when demand is being squeezed by higher raw material costs. So that's recessionary if anything.

However, the Bank doesn't operate in a vacuum. About 95% of the world's central banks are now tightening, according to liquidity watchers CrossBorder Capital. New Zealand's central bank raised rates by a full half-percentage point this morning.

The Bank of England might not be able to make things better by taking action, but if it doesn't act, it could certainly make things worse. If the Bank looks as though its lagging its international peers, then the market will take it out on the pound. A weak pound, all else being equal, is more inflationary than a strong pound, as it makes imports more expensive.

You can already see this happening with the Japanese yen. The Bank of Japan is calmly insisting that it will keep printing money and holding the 10-year Japanese government bond yield down even as the rest of the world starts to tighten monetary policy. As a result, the yen is falling hard against the US dollar.

The difference in Japan at least is that inflation remains an elusive creature. You just can't say that for the UK.

The reality is that whether they like it or not, and whether they think it's recessionary or not, the Bank of England will have to "do something". The only something it can do is to tighten monetary policy. Whether there's a big dramatic half-point hike or not, the direction of travel for the next few months at least is pretty clear.

What should you do? It probably is a decent time to look at your mortgage. If it's not fixed or it's close to time to change, you should probably err on the side of locking in the best rate you can find.

As for savings - you probably want to think about the opposite. Rates are poor just now and likely will remain so, but maintain your flexibility - no point on locking your cash up in the best five-year account today if rates are going higher.

And subscribe to MoneyWeek. We're giving away your first six issues free plus you get a free PDF of all our post-pandemic coverage on inflation which should provide you with a good backgrounder as to how we ended up here and as to what assets tend to do well during inflationary times. Sign up now.


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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.