LONDON (Reuters) - Inflation in Britain rose faster than expected to a near 30-year high in December, intensifying a squeeze on living standards and putting pressure on the Bank of England to raise interest rates again.
The annual rate of consumer price inflation increased to 5.4% from November’s 5.1%, the highest since March 1992, the Office for National Statistics said. Economists polled by Reuters had expected a rise to 5.2%.
Financial markets now price in a more than 90% chance that the BoE will raise its main interest rate to 0.5% on Feb. 3. Last month it became the world’s first major central bank to tighten policy since the start of the COVID-19 pandemic.
“The Bank of England was already feeling uncomfortable about its monetary policy stance. Today’s upside surprises to both the headline and core inflation readings will certainly not have helped,” said Ambrose Crofton, global market strategist at J.P. Morgan Asset Management.
Two-year British government bond yields, which are sensitive to financial markets’ interest rate expectations, came within a whisker of their highest level since 2011.
Inflation has risen sharply across most advanced economies, reflecting a global rise in energy prices and supply chain difficulties.
But the BoE appears more concerned than the U.S. Federal Reserve or the European Central Bank that labor shortages and wage pressures will cause inflation to be slow to fall back once immediate price pressures have passed.
A surge in cases of the Omicron coronavirus variant had negligible impact on inflation, ONS statisticians said.
Instead, prices for food, hospitality and household goods were the main factors pushing up inflation in December while fuel prices - the main driver in previous months - remained at recent highs.
British inflation is widely expected to peak in April when regulated household energy bills look set to increase by around 50%. Last month the BoE forecast a peak of around 6%, but now some economists see 7% as more likely.
Rising inflation is also turning into a political problem for Prime Minister Boris Johnson’s government, which faces calls from the opposition and charities to offset the rise in energy bills, which comes at the same time as a tax increase on wages to fund higher health and social care spending.