UK inflation suddenly rose to 3% last January, 10 months to that point at which level, surprising expectations that the Bank of England would decrease interest rates before long.
Increasing air fares, food, and school fees prompted the increase over 2.5% December’s level triggered by the initiation of the sales tax of the new Labour administration.
Economists had predicted an increase to 2.8%, but the larger-than-anticipated surge could catch central bank policymakers off guard, especially as economic growth is still weak.
The Bank of England reduced interest rates to 4.5% last month, its third reduction in six months, and lowered its 2025 growth projection to a paltry 0.75%.
Slower growth is a political issue for the Labour government, which has put economic growth at the head of its agenda. More dovish interest rates would lower the price of mortgages and stimulate borrowing, but inflation fears can constrain how far further cuts can go.
Economists predict that inflation will increase even more in the short term due to increased energy bills before falling later this year. The Bank of England can now be more complacent, delay or reduce the number of rate cuts expected.
“A rate cut in March next year appears less and less likely,” said abrdn deputy chief economist Luke Bartholomew. “Second-half relief will hinge on the timing of when inflation returns to 2%.”
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