UK Inflation Rises to 30-Year High of 5.5% amid Cost of Living Crisis

The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation increased to 5.5% in January from 5.4% a month earlier, driven by prices for clothing, footwear and furniture, The Guardian reported.

City economists had forecast the inflation rate to remain at 5.4%. The ONS said inflation was last higher in March 1992, when it stood at 7.1%.

With inflation predicted to hit more than 7% in April, the latest increase is expected to heap further pressure on the government, while putting the spotlight on the Bank of England to raise interest rates again.

Business and consumer groups warned the rise in prices since last summer would harm living standards and push more firms towards insolvency. The CBI lobby group said the government needed to react by cutting taxes on investment to boost productivity and allow businesses to award sustainable annual wage rises.

Suren Thiru, the chief economist at the British Chambers of Commerce, said he expected the Bank to raise rates at its March meeting to 0.75%. Threadneedle Street raised rates in December and February to the current level of 0.5% against a backdrop of surging inflationary pressure.

However, Thiru warned that tightening monetary policy too quickly risked undermining confidence and the wider recovery. “(It) will do little to curb the global factors behind the current inflationary surge,” he said.

“More needs to be done to limit the unprecedented rise in costs facing businesses, including financial support for those struggling with soaring energy bills and delaying April’s national insurance rise.”

Despite the increase in the annual inflation rate, the ONS said prices for goods and services fell by a modest 0.1% in January after restaurant and hotel prices – which played a large part in the inflationary surge before Christmas – fell back.

The rising costs of some household goods also pushed up inflation, although were offset partially by cheaper petrol and diesel prices in January after record highs at the end of 2021.

Although there were price drops for clothing and footwear in the traditional high street sales season at the start of the year, the ONS said it was the smallest January fall since 1990. With the CPI index calculated as the annual change for a basket of goods and services, this added to inflation.

Most economists expect inflation to fall in the second half of the year after reaching a peak above 7% in April, when the energy regulator Ofgem will raise the cap on energy bills.

The rise in the cap will add more than £600 to annual bills but could be increased again in October unless the cost of gas and petrol on international markets drops as expected in the summer.

The Bank of England said last month that inflation should decrease over the next two years to its target rate of 2% once interest rates have risen above 1%.

Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said inflation should reach 5% by January next year, then fall below the Bank’s target by April 2023.

He said the easing of COVID supply chain restrictions on imports should increase the number of new cars brought into the UK and after that bring down the cost of secondhand vehicles, which have risen sharply during the pandemic.

“Accordingly, we think that the near-term strength in CPI inflation will persuade the MPC (monetary policy committee) to hike Bank Rate to 0.75% in March and 1.00% in May but the subdued medium-term picture will then persuade the committee to stop there,” he added.