UK inflation returns to double digits as food prices soar

SOARING food prices drove UK inflation back into double digits in September, intensifying pressure on the government and central bank to act.

The Consumer Prices Index rose 10.1 per cent last month from 9.9 per cent the month before, the Office for National Statistics (ONS) said on Wednesday (Oct 19). That matched a 40-year high reached in July and exceeded economists expectations for 10 per cent.

The figures leave inflation well above the Bank of England’s (BOE) 2 per cent target, adding to pressure on policy makers to lift the key rate significantly next month. The danger is that prices accelerate again early next year after the government loosens its support for household energy bills.

The worsening inflation outlook sheds light the Bank of England’s decision to start selling its holdings of government bonds at the start of next month. The bank had delayed unwinding the portfolio accumulated during years of so-called quantitative easing after the government’s ill-fated tax-cutting plan roiled markets last month.

Starting quantitative tightening draws a line under the market intervention earlier this month to stave off a fire-sale in gilts, puts the inflation fight back at the centre of the bank’s focus, and will complement moves to tighten financing conditions with higher interest rates.

Gilts were broadly lower on Wednesday after the central bank’s decision thwarted hopes for an outright delay to sales with 10-year rates climbing seven basis points to 4.01 per cent.

Soaring prices have delivered the sharpest squeeze on consumer spending power in decades, leading to a plunge in poll ratings for Prime Minister Liz Truss’s government. While she introduced generous aid for households energy bills and tax cuts to jump-start growth, a market rout forced her to backtrack on many of those measures, leaving open the question how ministers will respond.

“I understand that families across the country are struggling with rising prices and higher energy bills,” Chancellor of the Exchequer Jeremy Hunt said in a statement. “This government will prioritize help for the most vulnerable.”

The Labour opposition blamed the government for rising prices. Rachel Reeves, the Labour member of Parliament who shadows Hunt, said, “inflation figures this morning will bring more anxiety to families worried about the Tories lack of grip on an economic crisis of their own making.”

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The pound dropped after the report, falling as much as 0.3 per cent on the day to US$1.1286. Gilts were broadly lower on Wednesday as the central bank’s decision thwarted hopes for an outright delay to bond sales from the BOE’s asset portfolio. The yield on 30-year bonds was little changed at 4.31 per cent, while 10-year rates climbed seven basis points to 4.01 per cent.

The ONS said food prices rose by 14.8 per cent from a year ago, also the strongest increase in more than 40 years. Furniture and household goods were another driver, rising 10.7 per cent in September.

“These rises were partially offset by continuing falls in the costs of petrol, with airline prices falling by more than usual for this time of year, and second-hand car prices also rising less steeply than the large increases seen last year,” said Darren Morgan, director of economic statistics at the ONS.

There were also signs of stickier inflation at the wholesale level. Producer prices, measuring the cost of goods leaving factories, rose 15.9 per cent from a year ago in September. That was slower than the previous month but slightly above expectations. Raw materials prices rose 20 per cent, also above expectations.

September’s inflation reading traditionally has been used to up-rate an annual increase in welfare benefits paid out starting the following April. It also feeds calculations about how much state pensions rise, though Hunt has yet to commit to using this year’s figure.

Meanwhile, scaling back aid for electricity and natural gas bills will expose consumers to surging prices in energy markets early next year. UK inflation may peak around 10.7 per cent this year but surge to 12 per cent in April if the government doesn’t manage to rein in spiraling energy costs, Bloomberg Economics estimates.

“We still expect inflation to peak in October this year, but this can only be achieved with more aggressive interest rate moves by the Bank of England, which could see base rates rising to at least 4.5 per cent early next year,” said Yael Selfin, chief economist at KPMG UK. BLOOMBERG