UK inflation soars above 5% months ahead of BoE’s spring 2022 projection

‘This will not sit well with the policymakers at Threadneedle’


Commentators are cautiously optimistic the Bank of England will rise rates at tomorrow’s monetary policy committee meeting, despite the uncertain outlook due to the Omicron variant, as inflation surpasses the central bank’s projections months in advance.

Data from the Office for National Statistics shows the consumer price index leapt to 5.1% in November from 4.2% in October, its highest level in a decade.

Last month’s readout exceeded consensus expectations of a 4.8% increase year-on-year and the Bank of England’s own 4.5% prediction. Britain’s central bank was not expecting inflation to surge above 5% until spring 2022.

The ONS said November’s inflation bump was mostly down to rising prices for petrol, second-hand cars, and clothing, however there were upward contributions almost across the board, suggesting pricing pressures are becoming more widespread.

Will Omicron force BoE to wait and see?

“We are almost getting used to big inflation numbers now, but this will not sit easy with the policymakers at Threadneedle street,” said Aegon Asset Management fixed income manager James Lynch.

The November inflation print coupled with Tuesday’s strong employment numbers should have made a call to hike rates at tomorrow’s MPC meeting “all but a foregone conclusion,” said Lynch, if it were not for the rapidly spreading Omicron variant.

“The only reason a move is now not going to happen would be is due to the value in waiting to see how the Omicron wave of infections affects government policy and economic activity in January,” he said.

“The reality is, it should not be a medium- or long-term consideration for inflation, if anything it may add to the inflation problem we already have.”

Inflation peak is yet to come

Despite the near-term uncertainty from the Omicron variant and the impact Plan B restrictions will have on the UK economy, Axa Investment Managers G7 economist Modupe Adegbembo believes the Bank of England will bow to the pressure to lift rates.

“We expect the MPC to take a cautious first step to tighten policy tomorrow, increasing the bank rate by 0.15% to 0.25% whilst guiding the importance of the evolution of Omicron on the path of future rate rises,” she said.

Adegbembo expects headline CPI to dip in December thanks to Christmas clothing discounts and softening oil prices feeding into petrol costs over the month.

But she warns “the peak is yet to come,” predicting inflation will increase in the coming months, especially as utility prices are expected to rise sharply in the next OfGem price cap adjustment in April 2022.  “This threatens to raise CPI inflation above our forecast of 5%.”

Goldman Sachs analysts expect inflation to remain elevated throughout 2021 and 2022 due to supply chain disruptions, re-opening effects and higher energy prices, with pricing pressures only starting to subside in H2 2022.

See also: Pressure mounts on BoE for rate ‘lift off’ as inflation jumps to 10-year high