Inflation climbs to 6.2% ahead of Spring Budget

The UK inflation rate has risen to its highest rate since March 1992, with the Office for National Statistics reporting that consumer prices had risen by 6.2% in the year up to February.

On a monthly basis, the Consumer Price Index (CPI) rose by 0.8% in February, the largest monthly CPI increase between January and February since 2009.

Last week, the Bank of England raised the interest rate to 0.75% as it seeks to combat rising inflation, which they believe will rise to 8% in April and hit an even higher level in October.

Chancellor Rishi Sunak is due to announce his spring statement later today, with many anticipating it will contain measures to contain the worsening cost of living crisis, which has seen fuel and energy costs skyrocket, and food prices soar.

The Guardian reports that in his spring statement, Sunak is expected to say: “So when I talk about security, yes – I mean responding to the war in Ukraine. But I also mean the security of a faster-growing economy, the security of more resilient public finances, and security for working families as we help with the cost of living.”

Industry reaction

Alastair Douglas, CEO of TotallyMoney, comments on the latest inflation figures: “All eyes are on the Chancellor today. There is simply no option for him to acknowledge the worst cost of living crisis in a generation as he takes the stand, and not do something about it.

“In its annual review of the basket of goods last week, the ONS noted that spending on petrol and electricity is so large they merit inclusion in the baskets in their own right. That’s a sign of our times. Millions are clearly already feeling the very real impact of the rising cost of living. They are eating into their overdrafts, digging into their savings and cutting food and heating costs whenever possible. But the pressure is worsening. The reality is, current government support is just not sufficient.

“The even more worrying thing is most people don’t realise that they could be hit with a £3,000 energy bill this year. Many will struggle to pay it, and that’s going to really dent consumer confidence. To add to that, the £200 loan scheme is simply pushing people into debt they don’t want. Renters who move house after the loan comes in won’t even benefit, and end up repaying something they weren’t given in the first place.

“If that’s not enough, energy prices have suddenly jumped from affordable to completely unaffordable. As inflation continues to soar, it’s even more important that we help consumers navigate and understand the situation. So, we need to give them the tools they need to understand their financial situation and manage these growing financial commitments as best they can.”

Ed Monk, Associate Director at Fidelity International, is also very concerned that things are only going to get worse.

He comments: “Price rises are accelerating and it’s likely that, even at these levels, they still have some way to go. The worry for households is that today’s reading for February does not capture the big rises in gas and electricity bills that we know are coming in April when the energy price cap is raised. Another big rise in the cap is expected in October too.

“Inflation at these levels will be unfamiliar to most households, who have been used to inflation rising only gradually. A year ago, CPI stood at just 0.4% compared to today’s rate of 6.2%. With aggregate pay failing to keep pace, there will be very few who will not be getting poorer in real terms as a result of the rising cost of living.

“This is a challenge for both monetary and fiscal policy. The Chancellor will address the rising cost of living later today and is under extreme pressure to act to alleviate the squeeze on budgets. At the Bank of England, rate-setters are treading a narrow path between doing what they can to cool prices through rate rises, while also trying to avoid stifling growth and running the risk of the UK falling into ‘stagflation’. The more dovish tone from the Bank last week suggests it is well aware of this danger.”

What is driving the rise in inflation?

Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson, takes a look at some of the factors driving the rising inflation rate.

She comments: “UK February annual CPI inflation came in above expectations at 6.2% (consensus: 6.0%) versus 5.5% previously. The underlying core CPI inflation (excluding energy, food, alcohol and tobacco) increased to 5.2% (consensus: 5%) versus 4.4% previously.

“The annual headline inflation continues to reach new 30-year highs, driven by a number of items. Food and non-alcoholic beverages rose by 5.1% over the year and the surge in clothing and footwear continued this month, increasing 8.9% from a year ago. Services also saw another leg up with recreation and culture increasing 4.7% year over year and restaurants and hotels increasing 5%.

“A continuing trend this month was the elevated annual figure for transportation, which increased 11.5%, owing to the supply chain constraints disrupting new and used vehicle prices. Price rises in electricity, gas and other fuels are still on an upward trajectory, rising 23.1% from a year ago.

“Elevated energy prices are at the forefront of everyone’s minds. The surge in prices has shown little sign of abating and the war in Ukraine is likely to mean energy prices will remain high and volatile.

“Economists have been quick to revise up their inflation forecasts to reflect current circumstances and annual CPI is not expected to peak until Q2 of this year at 7.5%, compared with previous forecasts which expected a peak in Q1. This is in line with the Bank of England’s forecasts and the decision last week to raise interest rates a further 0.25% to 0.75%.

“The BOE has made it clear that it is more concerned about rising inflation than moderating growth. Further interest rate increases are expected over the coming months with money markets pricing in a base rate of 2% by the end of the year.

“Although war in Ukraine has increased risks to both inflation and growth, we should not lose sight of fundamentals which remain strong. Earnings growth in equity markets has resumed an upward trajectory and low levels of unemployment prevail in developed economies around the world.”

Is the figure a true reflection of the situation?

George Lagarias, Chief Economist at Mazars, says the inflation figures are yet to fully reflect the changes caused by the war in Ukraine.

He comments: “Inflation at 6.2% for the year to February slightly beat expectations. It was mainly driven by housing services and transportation costs, in essence capturing the rent rises and return to work after emergency lockdown measures ended.

“Input inflation rose by 14.7%, nearly one percentage point more than the median forecast. These numbers, high as they are, just barely begin to capture the commodity price dislocations we observed during the days following the war in Ukraine, which began late in February. For the next few months, we would expect to see higher headline inflation, possibly even close to 10%, as companies begin to pass higher input costs onto clients.

“The key determinant of economic performance and policy decisions in the next few months will, in all probability, be inflation. Higher inflation can lead to tighter interest rates and jeopardise the economic recovery while at the same time restricting consumers’ real incomes, challenging policymakers to respond.”

Time to consider inflation proofing?

In light of rising inflation, Rachel Winter, Associate Investment Director at Killik & Co, says long-term savers should think about inflation-proofing.

She comments: “Inflation continues to suffocate economic growth as we plunge deeper into a cost-of-living crisis, grappling with a triple whammy of higher petrol prices, household bills, and food prices.

“In a bid to tame soaring prices and stabilise the market, the Bank of England raised interest rates for the third time in a row last week. This comes as economists predict that Britain could experience double-digit inflation for the first time in 40 years, threatening the economy’s financial stability unless the inflationary pressure is relieved. The impact of an interest rate rise can take months to feed through to the real economy, and so all eyes will be on Rishi Sunak as he delivers the spring statement for some more immediate solutions.

“As a result, it is more important than ever for long-term savers to consider inflation-proofing. Cash savings are currently being eaten up by inflation. As we approach the end of the year, consumers should look to use products such as stocks and shares ISAs to offer them a better chance of generating above-inflation returns.”