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UK inflation rose more than expected to a 10-month high of 3 per cent in January, highlighting the challenge for the Bank of England as it contends with persistent price pressures and a weakened economy.
The annual rate of price growth was above the 2.5 per cent recorded in December and the 2.8 per cent forecast by economists polled by Reuters, the Office for National Statistics said on Wednesday. It was also well above the recent low of 1.7 per cent in September.
The increase was driven by airfares dropping less than is usual in January, higher costs for private schools after the government imposed VAT on fees and higher costs for food and non-alcoholic drinks, the ONS said.
Services inflation, a key measure of underlying price pressures for rate-setters, rose to 5 per cent in January, up from 4.4 per cent in December, but was below the BoE’s expectations of 5.2 per cent. Core inflation, which excludes energy, food, alcohol and tobacco, climbed to 3.7 per cent from 3.2 per cent in December, in line with analysts’ expectations.
Ruth Gregory, an economist at the consultancy Capital Economics, said that concern at the BoE would be tempered by the role of airfares in January’s rise and the smaller than expected increase in services inflation.
“We doubt this [inflation data] will prevent the Bank of England from cutting interest rates further, but it will mean it continues to cut rates only slowly,” she said.
The BoE said this month that price pressures were on “a bumpy path” as it forecast inflation would rise to 3.7 per cent in the middle of the year, propelled by higher global energy costs. The central bank said it expected inflation to later fall back to around its 2 per cent target.
UK wage growth excluding bonuses rose to an annual rate of 5.9 per cent in the three months to December, figures published on Tuesday showed. But economic growth has been weak, with official data last week showing a marginal expansion of 0.1 per cent in the three months to December, following the stagnation of the previous quarter.
BoE governor Andrew Bailey on Tuesday said the central bank had been able to cut interest rates three times since last summer owing to falling inflation, which hit a 41-year high of 11.1 per cent in October 2022, and because “we are facing a weak growth environment in the UK”.
He also reiterated the BoE’s intention to take a “gradual and careful” approach to interest rate cuts, adding that a likely further rise in inflation this year was among the “challenges” facing the central bank.
Following Wednesday’s figures, traders continued to bet that the BoE would deliver two further quarter-point cuts in rates this year after lowering borrowing costs this month, but scaled back the chance of the first move coming in March to 15 per cent from 25 per cent.
The yield on the rate-sensitive two-year gilt rose 0.04 percentage points to 4.28 per cent. The pound was down 0.2 per cent on the day against a broadly stronger dollar at $1.258.
Zara Nokes, global market analyst at JPMorgan Asset Management, said that this week’s data would cause the BoE “quite a headache” and officials should put “greater weight on the upside inflation risks as opposed to any moderate cooling in economic activity”.
According to ONS data, the annual inflation rate in the education sector rose to 7.5 per cent in January from 5 per cent in December, reflecting a 12.7 per cent increase in the cost of private schools after the government levied VAT on fees.
Food and non-alcoholic beverage prices rose 3.3 per cent in January, up from 2 per cent in December.
Responding to Wednesday’s figures, chancellor Rachel Reeves said: “Since the election we’ve seen year-on-year wages after inflation growing at their fastest rate — worth an extra £1,000 a year on average — but I know that millions of families are still struggling to make ends meet.”
The rebound in inflation is a blow to Reeves, who has been criticised by businesses for October’s tax-raising Budget, with polls suggesting she is losing the confidence of the public.
An Ipsos survey this month found that 46 per cent of voters thought she was doing a bad job as chancellor with only 16 per cent positive, giving her the worst net rating since Labour took office in July.
Mel Stride, shadow chancellor, said: “Today’s inflation figures mean further pain for family finances — and it’s thanks to the Labour chancellor’s record tax hikes and inflation-busting pay rises.”
With additional reporting by George Parker in London