UK inflation jumps to 10.4% in February
The rate of inflation increased in February following two months of falls, increasing pressure on households and the Bank of England ahead of its interest rate meeting tomorrow.
UK inflation jumped unexpectedly in February, placing fresh pressure on the Bank of England (BoE) to raise interest rates at its meeting tomorrow.
Data from the Office for National Statistics showed consumer prices index (CPI) rose by 10.4% in the 12 months to February 2023, up from 10.1% in January following two consecutive months of declines.
We look at why inflation is rising, and what it means for you.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What is driving inflation?
Rising prices at restaurants and hotels were the main drivers of inflation, rising 12.1% year-on-year in February, up from 10.8% in January and the highest rate since 1991. Higher alcohol prices also helped push the headline figure higher.
More worryingly, food inflation is running at its highest rate in over 45 years. Food prices rose 18.2% in the year to February 2023, up from 16.8% in January, driven largely by vegetables, bread and cereals, and chocolate and confectionery.
The prices of clothing and footwear also jumped 8%. Although it had been expected prices would increase following the January sales, the rebound is the fastest recorded since 2012.
Slowing inflation in the recreation and culture sectors partially offset this growth. Price growth in these sectors slowed from 5% in January to 4.1% in February.
The annual rate of inflation for transport also eased, from 3.4% in January to 3.1% in February.
What does rising inflation mean for interest rates?
The BoE has been hiking rates over the last year to tackle double-digit inflation. The base rate currently sits at 4%, its highest rate since 2008.
The banking turmoil due to the collapse of Silicon Valley Bank and UBS’s takeover of Credit Suisse had led to some predictions the bank would pause hikes to soothe worries about a crisis.
But the latest inflation figures are likely to be a bigger influence on its decision.
“It had been touch and go about whether the Bank of England will raise rates but now with consumer price inflation rising to 10.4% on the month, it looks increasingly likely a hike will be voted through tomorrow,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Although the banking turmoil will be front of mind, this latest snapshot and ongoing worries about a tight labour market are likely to tip the balance in favour of a rate hike.”
Indeed, it would seem the BoE has “little choice but to keep ratcheting up rates”, says Rob Morgan, chief investment analyst at Charles Stanley.
“Were it not for this hot inflation reading, the next interest rate decision… would have been finely balanced,” adds Stanley. “The extra uncertainty caused by concerns over the health of some banks on both sides of the Atlantic, and the tighter conditions this implies, gives reason to pause. Now the likelihood is that rates will move up further, albeit at the slower pace of 0.25%.”
What next for inflation?
Last week, the Office for Budget Responsibility forecast inflation would fall to 2.9% by the end of the year, but the latest surprise jump shows we still have a long way to go,
“With wage growth easing in January and energy bills saved from a 20% hike in April thanks to Jeremy Hunt’s extension to the Energy Price Guarantee, the road ahead appears brighter,” says Alice Haine, personal finance analyst at investment platform Bestinvest.
But the latest rise in inflation coupled with the banking sector’s turmoil “is raising a fresh set of challenges for the Bank of England, which must now decide whether to push ahead with a widely expected 25 basis point rate hike or put their monetary tightening plans on pause until the banking turbulence passes,” continues Haine.
“If the decision is to pause, this could mean inflation stays high for longer as workers benefit from end-of-tax-year pay rises and, for the lucky ones, bonuses too.”
We could see the rate of inflation fall In the short term. “Inflation should resume its downward trajectory in March, when the strong base effect from the comparison to March 2022 – when Russia’s invasion of Ukraine sent fuel prices skyrocketing – is expected to lower the headline rate,” says Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
But even though “Britons are cutting back at the margins, the core factors fuelling inflation are sticky because they form part of essential expenditure for many,” says Myron Jobson, Senior Personal Finance Analyst at interactive investor. “Britons are still spending which is not allowing the economy to cool and is keeping inflation elevated.”
What does rising inflation mean for you?
Everyone’s inflation number will vary, but a rise in the headline figure places fresh pressure on households already struggling with rising bills, higher mortgage costs, falling real wages and April’s tax hikes.
“Higher inflation will pose a fresh challenge for mortgages and the wider property market, as it dents purchasing power - something lenders carefully consider when evaluating a borrower’s suitability for a mortgage,” says Haine.
“Add in significantly higher interest rates than a year ago – and the potential of further rate increases to come – and first-time buyers and those looking to remortgage will find they can afford less house for their money.”
If the BoE hikes rates tomorrow, mortgage rates are likely to remain around their current 5% average.
While savers have benefited from rising rates as banks pass these on to their customers, “inflation needs to dip significantly before savers really start to gain in real terms”, says Haine.
“Moving money languishing in an account with an ultra-low interest rate to one offering better returns now would be a wise move as savings could actually generate a positive return in the months ahead if inflation really does ease rapidly as hoped,” adds Haine.
High inflation also makes it more difficult to save for the long term. “Against this backdrop, people need iron will and discipline to take positive steps with their pension, like increasing contributions,” says Becky O’Connor, director of public affairs at PensionBee.
“Not only is it harder to find the spare cash to make contributions, it also makes it harder to generate a ‘real’ return above inflation, so your money still has purchasing power when you need it later on.”
But pension saving does come with tax relief, so those who can afford to top up their pension could find this a good way to shield their income from the taxman.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.
-
Do you qualify for the Winter Fuel Payment if you live abroad?
The Winter Fuel Payment will be means tested for expats living in Europe, in line with the new rules impacting those in the UK. But a quirk in the system means not all countries are eligible.
By Katie Williams Published
-
What the Employment Rights Bill means for your job
New workplace reforms are set to give employees new rights to benefits and flexible working
By Marc Shoffman Published
-
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
-
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
-
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
-
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
-
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
-
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
-
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
-
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published