Inflation in the UK climbed to a 10-month high in January, according to official data released on Wednesday, a development that is likely to temper expectations of swift interest rate cuts from the Bank of England, reports AP. The Office for National Statistics reported that inflation, as measured by the consumer prices index, increased to 3% in the year to January, up from 2.5% the previous month. NBR to launch AEO next week to fast track int'l businesses This rise, which pushed inflation further beyond the bank’s 2% target, was primarily driven by higher airfares, food costs, and private school fees following the new Labour government’s decision to introduce a sales tax. While economists had projected an increase to 2.8%, the magnitude of the surge has been unexpectedly high and is likely to raise concerns among central bank policymakers, particularly as they continue to express apprehensions about the UK's sluggish economic growth. Earlier this month, the bank reduced its main interest rate by a quarter of a percentage point to 4.50%—its third cut in six months—after slashing its 2025 growth forecast for the UK to 0.75%. If growth remains weak, it will be a significant setback for the UK’s new Labour government, which has prioritised economic expansion as a means of improving living standards and generating revenue for underfunded public services. As growth remains elusive, the party’s popularity has declined sharply since its election victory in July. The government will undoubtedly hope that the central bank provides support by further reducing interest rates, as this would lower mortgage costs and make borrowing more affordable, albeit at the expense of reduced returns for savers. DSE opens lower, CSE sees early gains Most economists expect inflation to rise further in the coming months due to increasing domestic energy bills, before beginning to decline in the latter half of the year. This should provide policymakers with scope to cut interest rates again—though possibly fewer times than previously anticipated. “A rate cut in March now seems highly unlikely, with the bank maintaining its cautious approach to easing for the time being,” said Luke Bartholomew, deputy chief economist at abrdn, formerly Aberdeen Asset Management. “However, whether the pace of rate cuts accelerates later in the year will depend on inflationary pressures returning towards 2%.”

Inflation in the UK unexpectedly decreased in December, a development that could increase pressure on the Bank of England to reduce interest rates next month and provide the government with some relief after recent financial market turbulence, reports AP. The Office for National Statistics reported on Wednesday that inflation, as measured by the consumer price index, stood at 2.5% in the year to December, primarily due to easing price pressures in the services sector, which constitutes around 80% of the UK economy. Germany's economy shrinks again This was down from 2.6% the previous month, with economists having predicted no change in the annual rate. While inflation has decreased, it remains above the Bank of England’s target of 2%. The bank determines interest rates based on its inflation expectations for the next one to two years. Therefore, if policymakers overlook a projected rise in inflation in the coming months, they may decide to cut borrowing rates at the next policy meeting on February 6, potentially providing relief to Treasury chief Rachel Reeves, who has faced negative headlines recently over her handling of the economy since Labour returned to power last July after 14 years. Asian stocks mixed ahead of US inflation data “The small decline in inflation will bring significant relief to both the Treasury and the Bank of England,” said Luke Bartholomew, deputy chief economist at abrdn. At the beginning of the year, financial markets anticipated three to four quarter-point interest rate cuts this year from the current 4.75%. However, in recent weeks, concerns about the UK’s inflation outlook have reduced those expectations. This shift has been reflected in the bond market, where the interest rate investors charge the UK government for 10-year loans has reached a 16-year high, partly due to concerns over the economic policies of U.S. President-elect Donald Trump and domestic issues. Regardless of the cause, these bond market shifts are likely to lead to higher interest payments for the government, adding pressure to Reeves' public finance projections. Critics argue that her first budget, delivered last October, will result in higher inflation than otherwise expected. The increased public spending in the budget will largely be financed through higher business taxes and borrowing. Some economists believe this spending spree, coupled with businesses potentially raising prices to offset tax hikes, could push inflation upwards and lead to higher interest rates. Inflation has significantly dropped from levels seen a couple of years ago, partly due to central banks raising borrowing costs from near-zero during the pandemic when prices began to rise due to supply chain disruptions and, later, Russia's full-scale invasion of Ukraine, which caused energy prices to surge. Asian shares mixed as Big Tech drops affect Wall Street As inflation has decreased from multi-decade highs, central banks have begun reducing interest rates, though few economists expect rates to return to the super-low levels seen in the years following the global financial crisis of 2008-2009.

Britain’s inflation rate rose for the first time in four months in February, surprising analysts and increasing pressure on the Bank of England to raise interest rates at its meeting on Thursday. The consumer price index jumped to 10.4% in the 12 months through February from 10.1% the previous month, as high energy prices continued to squeeze household budgets, the Office for National Statistics said Wednesday. While economists expect prices to drop rapidly later this year, inflation is more than five times higher than the Bank of England’s 2% target. The central bank will weigh the need to control inflation against concerns about the fallout from global banking troubles when it decides whether to raise interest rates on Thursday. The bank has approved 10 consecutive rate increases since December 2021, pushing its key bank rate to 4%. Michael Hewson, chief analyst at CMC Markets UK, said he expects the Bank of England to raise rates by at least a quarter of a percentage point. “A base rate of 4% barely seems adequate to act as a drag on this measure of price rises and will still increase the pressure on the Bank of England” to raise rates on Thursday, Hewson said in a note to clients before the inflation figures were released.