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The UK’s inflation rate has increased for the second consecutive month, with prices rising at the sharpest pace since March. The new reading means inflation is higher than the Bank of England’s target of 2% and could have implications for interest rates.
According to the Office for National Statistics, petrol and diesel prices were among the key drivers of the rise. In addition, tobacco increased in price after the chancellor raised taxes in the budget and the cost of clothing, footwear and electronic games also increased. However, the price of services, including theatre and concert tickets, education and health, rose faster than goods. The cost of housing, rent included, rose by 7.8% YoY to November.
While an annual inflation rate of under 2% is seen as healthy, concerns about pressure on incomes as prices continue to rise persist. The Bank of England anticipates that inflation will climb to 2.75% in the second half of 2022 before falling again. The UK government’s official forecasting body, the Office for Budget Responsibility, expects a similar increase.
No significant cost of living crisis is expected, but predicting future prices is difficult to due several factors that could influence them. Housing costs, both mortgage and rental, are a significant source of financial pressure. While the rate of inflation may come down in 2022, prices will still rise but more slowly.
The Bank of England’s interest rate-setting committee will meet to deliberate whether or not to cut rates. Rates are unlikely to change from their current level of 4.75% as higher interest rates play a role in keeping inflation in check by limiting borrowing and spending. Investors expect interest rates to be cut in 2022, but this process has slowed considerably in comparison to previous forecasts
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