Jump in UK inflation fuels rate rise speculation

UK prices unexpectedly jumped in November due to higher petrol prices and utility bills, prompting speculation that the Bank of England may raise interest rates in the new year.

The Office for National Statistics said on Tuesday that the consumer price index, which measures the Bank of England’s inflation target but which does not include mortgage payments, rose 1.5 per cent in the year to November, compared with 1.2 in October.

The retail price index, which includes housing costs and is Britain’s most familiar inflation measure, stood at 3.4 per cent last month, up from 3.3 per cent in October, its highest level for more than six years.

Ross Walker, economist at the Royal Bank of Scotland, said the increase in the RPI, which is used as the benchmark for pay settlements, could potentially cause the Bank of England to raise interest rates in the new year.

He said: “In November last year, RPI was 2.5 per cent, and if this pick-up in inflation is mirrored by increases in pay deals early next year, then a further rise in base rates will be more likely than not.”

But he added: “Without a bit more wage inflation, higher oil-related consumer prices will tend to constrain disposable incomes and dampen inflation pressures.”

Other economists said inflation could ease in the next months as lower petrol prices filtered into the statistics. Over the past weekend, most supermarket chains and petrol stations reacted to the recent drop in crude oil and cut the price of petrol by about 3-4p to below 80p per litre.

Jonathan Loynes at Capital Economics stressed that petrol remained by far the biggest influence on the CPI. Stripping out fuel costs, CPI inflation would have been just 0.9 per cent in November, below the level at which the Bank has to write an explanatory letter to the Chancellor.

The ONS said the main upward effect on the CPI came from transport, in particular air fares. Seasonal reductions this year were much less pronounced than a year ago. Fuel and lubricants also contributed.

Another upward effect came from housing and household services, reflecting significant tariff increases by utility companies. These would continue to feed into the CPI in December and January, the ONS said.

Tuesday’s increase surprised most forecasters. The latest collection of economists’ opinions by the Treasury saw the medium forecast for CPI at the end of this year at 1.4 per cent and the RPI at 3.2 per cent. New forecasts are due on Wednesday.