Pressure builds for rate rise as inflation jumps to 4.4%
Rising heating costs and higher clothing prices pushed official inflation to 4.4% in February, even higher than the rise to 4.2% economists had been forecasting.
This is the highest annual rate of inflation since November 2008 and more than double the official 2% target.
The news pushed the pound higher against both the dollar and the euro as expectations grew that the Bank of England will be persuaded to lift interest rates in the months ahead.
Higher interest rates boost demand for currencies as investors are attracted by the higher returns.
James Knightly, economist at ING, said he was not surprised that the official inflation figure overshot market forecasts given the rise in fuel costs and utility bills and said ‘with higher fuel costs set to continue adding upward pressure we see inflation pushing on to 5% in the next few months.’
Retail price inflation, which includes housing costs, also jumped, reaching 5.5% in the year to February, up from 5.1% in the year to January.
This means the 'pressure on the Bank of England to be seen to be doing something on inflation,' is increasing, said Knightly.
But Kathleen Brooks, research director at forex.com, said the gains by the pound this morning were limited as it is not clear that this latest inflation overshoot will force the Bank to raise interest rates.
Brooks said while headline inflation is rising it is clear that wage growth is moderating and higher prices are eroding incomes and UK-rate-setters will be worried about lifting rates and adding to the squeeze.
'Higher headline inflation could actually reduce the chance of rate hikes by the BOE. The Bank needs to keep rates low when household incomes are falling in an effort to artificially stimulate growth when spending remains constrained,' she said.
The Bank of England will publish the minutes of its most recent meeting tomorrow and they are expected to show a fierce battle is being fought between those members of the rate-setting monetary policy committee who want to lift rates and those who believe such a move would threaten the UK's already feeble recovery.
Rising heating costs and higher clothing prices pushed official inflation to 4.4% in February, even higher than the rise to 4.2% economists had been forecasting.
This is the highest annual rate of inflation since November 2008 and more than double the official 2% target.
The news pushed the pound higher against both the dollar and the euro as expectations grew that the Bank of England will be persuaded to lift interest rates in the months ahead.
Higher interest rates boost demand for currencies as investors are attracted by the higher returns.
James Knightly, economist at ING, said he was not surprised that the official inflation figure overshot market forecasts given the rise in fuel costs and utility bills and said ‘with higher fuel costs set to continue adding upward pressure we see inflation pushing on to 5% in the next few months.’
Retail price inflation, which includes housing costs, also jumped, reaching 5.5% in the year to February, up from 5.1% in the year to January.
This means the 'pressure on the Bank of England to be seen to be doing something on inflation,' is increasing, said Knightly.
But Kathleen Brooks, research director at forex.com, said the gains by the pound this morning were limited as it is not clear that this latest inflation overshoot will force the Bank to raise interest rates.
Brooks said while headline inflation is rising it is clear that wage growth is moderating and higher prices are eroding incomes and UK-rate-setters will be worried about lifting rates and adding to the squeeze.
'Higher headline inflation could actually reduce the chance of rate hikes by the BOE. The Bank needs to keep rates low when household incomes are falling in an effort to artificially stimulate growth when spending remains constrained,' she said.
The Bank of England will publish the minutes of its most recent meeting tomorrow and they are expected to show a fierce battle is being fought between those members of the rate-setting monetary policy committee who want to lift rates and those who believe such a move would threaten the UK's already feeble recovery.
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