UK inflation overshoot adds pressure for big BOE rate hike

[LONDON] UK inflation unexpectedly accelerated for a fourth straight month in January, a surprise that will likely embolden bets on a super-sized Bank of England (BOE) interest-rate increase next month.

Annual price growth rose to 5.5 per cent, a new 30-year high, driven by clothing and footwear prices. Both economists and the BOE had expected inflation to remain unchanged at 5.4 per cent. An index that excludes volatile items quickened to 4.4 per cent, the highest since at least 1997.

The figures highlight a brutal cost-of-living crisis that's only set to worsen this year, with a 54 per cent surge in energy bills and higher taxes due in April. The BOE is predicting inflation will peak at 7.25 per cent by that time, more than triple its 2 per cent target.

The pound gained after the data, climbing 0.2 per cent at US$1.3560 as of 07.19 am in London.

Inflation, which has surged from just 0.4 per cent a year ago, has overshot forecasts in 7 out of the past 9 months. The latest figures along with buoyant labour-market data this week may strengthen the case for the BOE to raise interest rates by 50 basis points next month, an unprecedented move since it gained independence in 1997.

Markets are already pricing in a half-point increase at 1 of the next 2 meetings of the Monetary Policy Committee. Further increases are likely, with current pricing suggesting the benchmark rate, currently 0.5 per cent, will hit 2 per cent this year - the highest since before the financial crisis.

Separate figures showed pipeline cost pressures continuing to build in January. Fuel and raw material costs rose 0.9 per cent following a steep rise in oil prices due to the risk of conflict between Russia and Ukraine. In response, producers raised their own prices by 1.2 per cent, 4 times the increase in December. BLOOMBERG