Fed Holds Rates In Wake Of Disappointing US Prices Data – Forbes Advisor UK

12 June: Market Remains Hopeful For Rate Cut Later This Year

The US Federal Reserve has held interest rates in a target range between 5.25% and 5.5%, a 23-year high, as the world’s largest economy continues to fight stubbornly elevated inflation, Andrew Michael writes.

The Fed’s rate-setting Federal Open Markets Committee (FOMC) announced today that it would maintain US borrowing costs at the same level as they have been since July 2023.

Explaining its decision, voted for unanimously by the 12-member FOMC, the Fed said: “The Committee judges that risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

Earlier on Wednesday, official consumer price index (CPI) figures from the US Bureau of Labor Statistics showed that annual US inflation rose by 3.3% in the year to May, down slightly on the figure of 3.4% recorded a month earlier.

The reduction was not sufficient to prompt an interest rate cut as early as today, but commentators are optimistic that the downward direction in the inflation figure will eventually result in a loosening of US monetary policy.

Chris Beauchamp, chief market analyst at online trading platform IG, said: “Just when all hope of a rate cut in 2024 seemed lost, today’s CPI reading has provided fresh reasons to expect a cut this year.”

Along with other central banks worldwide, including the Bank of England and the European Central Bank (ECB), the Fed is tasked with maintaining inflation at a rate of 2% over the long term.

Last week, the ECB joined the Swiss National Bank, Sweden’s Riksbank and the Bank of Canada in cutting rates by a quarter of a percentage point.

Commenting on today’s events in the US, Lindsay James, strategist at Quilter Investors, said: “With mixed signals coming from the labour market, showing strong payrolls data alongside rising unemployment and falling vacancies, the picture of a gradually slowing economy is not yet enough to ring alarm bells at the Federal Reserve, who remain laser-focused on price stability.

“With the main lesson from the ‘Great Inflation’ period of 50 years ago being that to cut interest rates too early can prove disastrous – both for the economy and for one’s reputation in the history books – the Fed will be anxious to avoid repeating the monetary mistakes of the 1970s. For now, one rate cut this year remains a sensible prediction.”

On Thursday 20 June, the Bank of England will announce its latest Bank Rate figure, which dictates borrowing costs in the UK. The Bank Rate currently stands at 5.25%, while UK inflation in the 12 months to May 2024 was 2.3%.

James McCann, deputy chief economist at abrdn, said: “The Fed unsurprisingly left policy unchanged but continues to just about keep the door open to rate cuts this year.”

Julian Howard, chief multi-asset investment strategist at GAM Investments, said: “While US headline CPI has fallen from its 9.1% peak in June 2022 to 3.3% today, the uncomfortable reality is that the ‘mid-threes’ is where inflation appears to have got stuck since the summer of 2023.

“Where does all this leave investors? Beyond the inevitable obsessing in the aftermath of today’s decision over whether one or two rate cuts are now going to be priced in before the end of the year, it’s probably fair to say that rate-sensitive investments… look set for continued volatility.”

6 June: Eurozone Headline Rate Falls From 4.5% To 4.25%

The European Central Bank (ECB) announced today that it is cutting borrowing rates for the eurozone by 0.25 percentage points, marking the first decrease since 2019, writes Bethany Garner.

Following today’s announcement, which was widely expected across the financial community, the central bank’s main refinancing rate is 4.25%, down from its all-time high of 4.50%. 

The ECB’s marginal lending facility has dropped to 4.50%, while its deposit rate now sits at 3.75%.

Explaining its decision to cut rates, the ECB said: “Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates stteady.

“Since the Governing Council met in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly.”

The ECB has not committed to further cuts in the near future, however. It added: “Interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.”

Today’s cut comes despite the recent uptick in eurozone inflation, which measures changes to consumer prices in the 20 countries that use the euro.

The figure nudged up from 2.4% in the year to April, to 2.6% in the year to May, according to Eurostat, moving further from the ECB’s 2% inflation target.

In reducing rates, the ECB follows in the footsteps of the Swiss National Bank, Sweden’s Riksbank and the Bank of Canada, each of which announced a 0.25 percentage point cut in their central bank base rates in March, May and June, respectively. 

Canada’s move was particularly significant given its membership of the G7 economic bloc – it is the first country in the group (which also includes the UK, US, Germany, France, Italy and Japan) to announce a base rate cut. It fell from 5.00% to 4.75%.

It is widely expected that the Bank of England (BoE) will announce a Bank Rate cut at its next announcement on 20 June, with the expectation that it will fall from its current 15-year high of 5.25% to 5.00%.

In the UK, consumer inflation stood at 2.3% in the year to April, edging towards the BoE’s 2% target (see story below), and paving the way for rate cuts.

There has been speculation that cutting the Bank Rate in the weeks before the General Election on 4 July might be seen as a political move, although the counter-argument runs that not cutting it in the face of compelling evidence to do so could also be seen as politically motivated.

Commenting on the ECB decision, Lindsay James, investment strategist at Quilter Investors, said: “The ECB has stolen a march on the Bank of England and Federal Reserve – who are both potentially still a few months away from cutting – and will breathe life into an economy that desperately needs some form of stimulus.

“While this news was expected, it will no doubt provide relief to consumers and businesses on the Continent. Ever since Russia’s invasion of Ukraine, Europe has struggled to combat the economic shock this produced, but signs are now improving, although uneven across the continent.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “ECB policymakers are expected to hit the pause button now, as sticky inflation has returned as a worry. While rates went straight up like a rocket, they look likely to descend in bumpy fashion.”

“The ECB decision will raise hopes that UK interest rates will also be brought down sooner rather than later. The data coming in over the past few days has been more positive for the Bank of England, indicating that price pressures are easing.”

22 May: April Inflation Lands Within Whisker Of BoE Target

Steep falls in gas and electricity prices helped annual inflation to fall sharply to 2.3% in the year to April, down from 3.2% a month earlier, writes Andrew Michael.

Today’s announcement from the Office of National Statistics (ONS) puts the figure at its lowest since July 2021. The Bank of England’s inflation target is 2%.

The news offers hope of an interest cut from the Bank of England as early as June this year. The decision will be announced on 20 June. The day before, the ONS will announce the inflation figure for May.

The Bank next meets to determine the level of the Bank Rate in August.

According to the ONS, the monthly reading of the Consumer Prices Index showed that prices rose by 0.3% last month, compared with a 1.2 percentage point increase in April 2023.

Core CPI, which leaves out volatile data covering energy, food, alcohol and tobacco, stood at 3.9% in the year to April compared with 4.2% a month earlier.

CPI including owner-occupier costs (CPIH) rose by 3.0% in the year to April, down from 3.8% in March.

Grant Fitzner, ONS chief economist, said: “There was another large fall in annual inflation led by lower electricity and gas prices, due to the reduction in the Ofgem energy price cap.”

The cap fell by over 12% from 1 April to £1,690 for a household with typical consumption. It is expected to fall below £1,580 from 1 July.

Fitzner added: “Tobacco prices also helped pull down the rate, with no duty charges announced in the Budget. Meanwhile, food price inflation saw further falls over the year. These falls were partially offset by a small uptick in petrol prices.”

In recent years, the Bank of England has struggled to keep inflation in check thanks to the economic turmoil following Covid-19, supply chain bottlenecks and geo-political tensions. 

In its bid to quell rising prices, the Bank has maintained UK borrowing costs at a 15-year high of 5.25% since August last year. Reacting to today’s news, commentators remained unsure about the possibility of a June cut.

Lindsay James, investment strategist at Quilter Investors, said: “Today’s inflation figure still puts the UK on course this summer for its first rate cut in more than four years. The fact the headline rate begins with a ‘two’ is incredibly symbolic given the events since the pandemic and the fact inflation was over 11% less than two years ago.”

Alice Haine, personal finance analyst at Bestinvest, said: “Households can breathe a sigh of relief after the UK’s headline inflation rate tumbled to 2.3% in the 12 months to April, as the runaway price rises that ignited the cost of living crisis finally beat a retreat.

“With inflation closer to the Bank of England’s 2% target, all eyes are pinned on next month’s interest rate decision to see if the central bank will deliver more summer cheer with a rate cut. While the possibility of a summer cut is being floated by members of the rate-setting Monetary Policy Committee (MPC), whether it happens in June or August remains to be seen.”

Neil Birrell, chief investment officer at Premier Miton Investors, said: “UK inflation is following the trend elsewhere and is proving to be more resilient than hoped. It is not getting back to target as fast as the Bank of England would like, which will probably delay the first interest rate cut.”

15 May: Inflation Down But Hopes Fade for Next Fed Meeting

US inflation rose 3.4% in the year to April, down from 3.5% in the year to March, but likely not enough to prompt a reduction in borrowing costs when the Federal Reserves announces its next decision on 12 June, writes Andrew Michael.

Today’s numbers from the Labor Bureau of Statistics also showed that inflation ticked up by 0.3% in April itself, compared with a 0.4 percentage point rise in March.

According to the Bureau, rises in the cost of housing and fuel were responsible for nearly three-quarters of the overall monthly increase.

The core US annual inflation rate, which omits volatile food and energy prices, rose by 3.6% in the year to April, down from 3.8% a month earlier. The Bureau reported a 0.3 percentage point rise for the core monthly figure in April, down slightly on the 0.4% rise recorded a month earlier.

Having raised borrowing costs aggressively last year to 5.25%, the Federal Reserve, the US central bank, appeared to be winning the challenge of bringing soaring inflation levels back down to their long-term target of 2% (which is shared by the Bank of England and other central banks).

In recent months, however, returning inflation to this target has proved trickier than expected.

Lindsay James, investment strategist at Quilter Investors, said: “While on the surface it is positive to see US inflation fall from the previous month, looking at the trend over the past 12 months provides a different picture. 

“Inflation has been bouncing around the 3%-4% range for a considerable period of time now, and this is now arguably singlehandedly preventing the Federal Reserve from pushing the button on rate cuts.”

Richard Flax, chief investment officer at Moneyfarm, said: “This is a positive announcement and should give some more comfort that the next move in rates will be a cut. But it is still far from the Fed’s target of 2%, so we wouldn’t expect a swift reaction from the Fed. 

“The Fed has been consistent in its message that the hard data is what matters, and therefore we can expect the status quo to continue for a bit longer.” 

Janet Mui, head of analysis at RBC Brewin Dolphin, said: “It is fair to say disinflation is in progress. It is just bumpy and taking longer to achieve the Fed’s desired level. The data is a relief for those who were worried about further re-acceleration in US inflation, but also shows inflation remains sticky and it could take a while to get back to 2%.

“Meanwhile, US retail sales were weaker than expected in April which adds to the narrative of a cooling economy. Taken together, today’s US data releases should add a bit of confidence to the Fed’s stance of leaning on rate cuts, but equally justifying a cautious approach in the timing of easing policy.”

9 May: Summer Reduction In Rates Hinges On Inflation News

The Bank of England has, as expected, kept borrowing costs at a 16-year high of 5.25%, the sixth time since August last year it has left its all-important Bank Rate unchanged, writes Andrew Michael.

Today’s announcement by the Bank’s Monetary Policy Committee (MPC), which voted by 7 votes to 2 to maintain the Bank Rate at its present level, echoes last week’s decision by the US Federal Reserve, which also chose to hold borrowing costs.

Both the Bank of England and Fed, along with the European Central Bank, are required by their respective governments to keep inflation at 2% over the medium to long-term.

In a bid to stave off soaring inflation levels during 2022 and much of 2023, the Bank of England raised borrowing costs 14 times in an aggressive bout of rate tightening not seen since the 1980s.

As a result, the UK’s inflation rate has fallen from a high of 11.1% in October 2022 to 3.2% in March 2024. The figure for April will be released on 22 May.

Bank officials will be hoping for a further reduction in the headline figure, potentially paving the way for them to reduce borrowing costs as early as June.

Today’s announcement means that millions of borrowers on variable rate and tracker mortgages and loans should not experience any direct impact on their repayments. Lenders, however, are at liberty to alter variable rate products should they choose to do so.

New borrowers and customers coming to the end of fixed deals and who are looking to remortgage later this year, around one million in total, will be on the lookout to see how lenders react to today’s announcement.

In recent weeks, high street providers have taken different approaches to pricing their home loan products, confirming how crucial it is for customers to shop around when looking for the best deals.

With the inflation figure hovering around 3% and interest rates at over 5%, it is possible for savers currently to receive a ‘real’ return on their cash held in bank and building society accounts, provided they hunt down the best deals.

A real return is obtained when the interest being paid out from a savings account or bond is greater than the prevailing inflation figure.

The Bank’s next rate-setting decision takes place on 20 June 2024.

Myron Jobson, senior personal finance analyst at interactive investor, said: “The Bank of England has kept interest rates steady for the sixth time in a row and will continue its ‘wait and see’ approach until it feels that the conditions necessary to cut the base rate are met. Premature cuts to interest rates risk unpicking the BoE its efforts to tame high inflation.

“While headline inflation has fallen to 3.2%, which is still above the 2% target, wage growth appears to be too high for comfort for the Bank’s, with a tight labour market exacerbating matters. The worry is this would entrench higher inflation over time.

“For now, Britons are still being buffeted by a double whammy of high inflation and high interest rates. With interest rates likely to remain high for some time, debt repayments will be a priority for many.

Shaun Port, managing director of savings at Chase UK, said: “The Bank of England’s decision to hold interest rates once again at 5.25% is positive news for savers looking to earn a good return on their money. However, with Bank Rate cuts potentially on the horizon, we’re now seeing savings rates coming down in anticipation, which means it is a good time for consumers to check if they’re making the most of their savings.

“If you value flexibility and easy access to your savings, check that your money is in an account that won’t penalise you or charge a withdrawal fee. Everyone’s circumstances are different, so the most important thing is that savers assess their finances and make sure their savings are in an account which best suits their needs.”

2 May: ‘Higher-For-Longer’ Narrative Sinks Deeper Roots

The US Federal Reserve has kept interest rates in a target range between 5.25% and 5.5% and signalled that borrowing costs are likely to remain higher for longer, as it continues to grapple with stubborn inflation across the world’s largest economy, writes Andrew Michael.

The Fed’s rate-setting Federal Open Markets Committee said yesterday that “inflation has eased over the past year” but admitted that “in recent months, there has been a lack of further progress towards the Committee’s 2% inflation objective”.

In the US, annual inflation recently reversed a downward trend and now stands at 3.5%. This compares with 3.2% in the UK, its lowest level in more than two years, and 2.4% across the eurozone.

So far this year, buoyant economic data from the US, such as stronger-than-expected employment figures and positive corporate earnings news, has dented the Fed’s inclination to press on with expected interest rate cuts.

The Fed, Bank of England and European Central Bank share a common target in trying to maintain long-term inflation at 2% across their respective economic blocs.

Although central banks worldwide have been successful over the past year or so in suppressing soaring prices and bringing down inflation levels from at or near double-digit levels, the last part of their collective challenge has met with resistance.  

Next Thursday, 9 May, the Bank of England delivers its own interest rate-setting decision with the strong likelihood that it too will leave borrowing costs – the Bank Rate – unchanged from their 15-year high of 5.25%.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The Federal Reserve has found that it has become a victim of its own success. Having supposedly achieved the notion of a soft landing for the economy, interest rates are looking like they will remain at elevated levels for considerably longer than much of the market had hoped.

“The  decision to keep them on hold and continue to wait for the data to change has become a familiar one over recent years and will result in the higher-for-longer narrative becoming more entrenched. Ultimately, the Fed is facing an economy that continues to prove remarkably robust. The labour market remains tight, and despite the persistence of inflationary trends, this is helping to drive economic growth.”

Seema Shah, chief global strategist at Principal Asset Management, said: “The Fed can no longer hide behind the idea that the recent strength in inflation is transitory. Its admission that there has been a lack of further progress confirms that imminent rate cuts are extremely unlikely.”

17 April: Lower-Than-Expected Fall Cools Rate Cut Hopes

Annual inflation dipped to 3.2% in the year to March 2024, its lowest level in more than two years, down from 3.4% recorded a month earlier, Andrew Michael writes.

Today’s announcement, from the Office for National Statistics (ONS), sees prices fall by less than hoped for by market-watchers, with some saying it could defer a cut in the Bank of England Bank Rate from the summer to the autumn.

But it will be welcomed by both individuals and businesses alike who endured a prolonged period of soaring prices lasting through 2022, when the inflation figure reached double-digit levels and stayed there well into last year.

The monthly reading of the Consumer Prices Index (CPI) from the ONS shows that prices rose by 0.6% last month compared with a rise of 0.8% in March 2023.

According to the ONS, the largest downward contribution to today’s headline figure came from food, with prices rising less than a year ago. Set against this was the rising cost of motor fuel.

Core CPI, which leaves out volatile data covering energy, food, alcohol and tobacco, stood at 4.7% in the year to March, down from 4.8% a month earlier.

CPI including owner-occupier costs (CPIH) stood at 3.8% in the 12 months to March 2024, unchanged from a month earlier. On a monthly basis, CPIH rose by 0.6% in March this year, compared with a rise of 0.7% for the same month in 2023.

Grant Fitzner, ONS chief economist, said: “Inflation eased slightly in March to its lowest annual rate for two and a half years. Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago. Similarly to last month, we saw a partial offset from rising fuel prices.”

The Bank of England, which is required by the government to maintain long-term UK inflation at 2%, has kept borrowing costs at their 15-year high of 5.25% since August 2023.

With inflation still running well above target and yesterday’s wage growth figures coming in hotter than expected, the UK’s central bank will be in no hurry to reduce interest rates, despite a recent suggestion by the Bank’s governor, Andrew Bailey, that cuts this year were “in play”.

Before today’s announcement Mr Bailey also said there was “strong evidence” that inflation was coming down in the UK. The Bank’s next interest rate-setting decision is due on 9 May.

The conundrum of when to reduce interest rates without risking an upwards jolt to inflation is not just a domestic issue.

Both the European Central Bank and US Federal Reserve have been grappling with the same challenge in recent months, each choosing to keep interest rates on hold while stubborn inflationary factors persist.

Over the past year, it appeared that the Fed would be first among the three central banks to bring down borrowing costs. But, in recent months, inflation has persistently remained above 3% in the US, with the annual figure lifting from 3.1% in January to its present level of 3.5%.

Today’s announcement means annual UK inflation is now lower than that of the US for the first time since early 2022. But it is higher than the Eurozone figure of 2.4%, which covers the European economic bloc that uses the euro.

Neil Birrell, chief investment officer at Premier Miton Investors, said: “UK inflation remained a little higher than hoped in March, reflecting the strength of the economy, particularly the consumer sector, which is in pretty good shape.

“Inevitably everyone will be wondering what this means for interest rate cuts. The answer is probably not much, as this is just a case of inflation not slowing as quickly as hoped. However, the data does mean it’s unlikely the Bank of England will move to the front of the starting grid when it comes to who cuts first: the Bank, the Fed, or the European Central Bank.”

11 April: Hopes Rise For Summer Cut To Euro Borrowing Costs

The European Central Bank (ECB) has, as widely expected, left borrowing costs untouched across the Eurozone, while potentially paving the way for interest rate cuts later this summer, Andrew Michael writes.

Today’s announcement means the central bank’s main refinancing rate remains at a record high of 4.5%, where it has stood since last October. The ECB’s marginal lending facility stays at 4.75%, while the deposit rate continues at a level of 4%.

Explaining its decision, the ECB said: “Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits”.

It added, however, that “domestic price pressures are strong and are keeping services’ price inflation high”.

Market watchers responded by suggesting that the tone of today’s statement could potentially result in an easing of borrowing costs across the Eurozone this summer.

Consumer prices in the 20 countries that share the euro rose by 2.4% in the year to March 2024. After a prolonged bout of interest rate rises by the ECB last year, Eurozone inflation now looks likelier to reach its long-term target of 2% more quickly than in the US, where buoyant economic data has kept inflation levels stubbornly elevated above 3% for months.

By way of contrast, annual UK inflation stood at 3.4% in the year to March 2024, with the next official figures due to be published next week. Borrowing costs remain at 5.25% where they have been since August 2023.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The European Central Bank has predictably opted to hold rates once more. Inflation appears to be better behaved and less sticky in the Eurozone than it has been elsewhere, particularly when compared to the US where just yesterday we saw another unwanted uptick which took headline inflation to 3.5%.

“Given the Federal Reserve is now expected to resist making any cuts for some time yet, and the Bank of England faces a difficult balancing act, the ECB could well be the first to make a move.”

Michael Field, European market strategist at Morningstar, said: “After recent comments from the Federal Reserve about potentially putting the brakes on US rate cuts for the time being, all eyes were on the ECB’s statement to ascertain whether the Fed’s reservations would have any impact on future interest rate decisions in the Eurozone.

“Thankfully, for European investors, it seems the ECB is happy to go it alone. The language in the statement is sufficiently vague but does not indicate that the ECB is backing away from cutting rates as soon as June.”

Felix Feather, economist at abrdn, said: “As expected, the ECB laid the groundwork for an imminent easing cycle by adjusting its monetary policy statement. The framing of today’s decision confirms that, barring any major economic surprises, the bank is on track to deliver a cut at its next meeting in June.

“Despite embracing the idea of cuts, the officials also stressed the need to keep policy restrictive some time, which would preclude a very sharp series of cuts. Nonetheless, we expect the bank to deliver several 25-basis point [quarter of a percentage point] cuts before the end of the year.”

10 April: Fed May Hold Off Until Summer Or Autumn

Headline US inflation rose by 3.5% in the year to March, up from 3.2% in the year to February, writes Andrew Michael.

Analysts say the increase provides the Federal Reserve with extra reason to hold off cutting borrowing costs from their present 22-year high until summer at the earliest. Indeed, buoyant economic data such as stronger-than-expected employment figures last week has raised the possibility that lingering inflation will possibly deter the Fed from reducing borrowing costs at all this year.

The increase recorded for March itself was 0.4%, the same as February, and 0.1 percentage point higher than January’s 0.3%. According to the US Bureau of Labor Statistics, rising fuel and housing costs accounted for more than half the latest monthly rise.

The core annual rate, which omits volatile food and energy prices, rose by 3.8% in March this year, the same figure as the previous month. The Bureau reported a 0.4 percentage point rise for the core monthly figure in March, the same increase as February.

Having cut interest rates aggressively during 2023, it appeared the Fed was winning the challenge of bringing soaring inflation levels back down to their long-term target levels of 2%.

However, while headline inflation continues to fall elsewhere round the world – the latest UK figure for February is 3.4%, down from 4% In January – US prices have largely flatlined or increased in recent months, keeping them above the 3% level. Euro area annual inflation stands at 2.4% for March 2024, according to the latest official estimate.

Richard Flynn, managing director at Charles Schwab UK, said: “Every piece of economic data is now being placed under the microscope as the market tries to predict when monetary policy will change, but these figures are unlikely to cause a shift.

“In recent months it has become clear that the journey to the Fed’s target of 2% inflation will be bumpy and central bankers are proceeding with caution when it comes to rate changes. It’s often said that the Fed takes the escalator up and the elevator down when setting rates. But for the path downwards in this cycle, it looks like they will opt for the stairs.”Neil Birrell, chief investment officer at Premier Miton Diversified Funds, said: “The US economy is running along at quite a pace and a June rate cut looks less and less likely – July or September is the call now. The Fed has got some head-scratching to do and, if other central banks were waiting for the Fed to move [first], they have got a conundrum on their hands.”

21 March: Rate-Setters Want More Evidence Inflation Is Beaten

The Bank of England has kept the Bank Rate at 5.25%, leaving UK borrowing costs unchanged for the fifth consecutive time since August last year, writes Andrew Michael.

Its Monetary Policy Committee voted by eight votes to one to hold the Bank Rate at its 16-year high, with the one dissenting voice, Swati Dhingra, favouring a rate reduction of a quarter of a percentage point to 5%.

Today’s announcement echoes last night’s decision by the Federal Reserve, the US central bank, which also chose to maintain interest rates at their existing level (see story below).

Along with other central banks, the Bank of England is required to maintain inflation at 2% over the medium to long-term.

In a bid to head off soaring inflation levels that beset the UK economy through 2022 and much of last year, the Bank raised borrowing costs 14 times in a row between December 2021 and August last year, in the most aggressive round of monetary policy tightening since the 1980s.

Despite yesterday’s official figures which recorded a sharp fall in annual inflation to 3.4% in February, from 4% a month earlier, the Bank has continued to tread a cautious path in terms of its monetary policy decisions.

Explaining today’s decision, the Bank said: “Headline consumer price index inflation has continued to fall back relatively sharply in part owing to base effects and external effects from energy and goods prices.

“The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. Nonetheless, key indicators of inflation persistence remain elevated.

“Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit.”

The Bank’s announcement means that millions of borrowers on variable rate and tracker mortgages and loans should not experience any direct impact on their repayments. Lenders, however, are at liberty to alter variable rate products should they choose to do so.

New borrowers and customers approaching the end of fixed deals and who need to re-mortgage this year, around one million account holders in total, will be watching closely to see how lenders react to today’s announcement.

In recent days, high street names have adopted different attitudes to pricing their home loan products confirming the importance for customers to shop around when looking for new deals.

For example, earlier this week NatWest chose to reduce selected five year fixed-rate mortgages, while TSB announced an increase to a number of fixed-rate loans.

The latest dip in the inflation figure means that today’s Bank Rate announcement allows savers to receive a ‘real’ return on cash held in bank and building society accounts, provided they seek out the best deals.

A real return is obtained when the interest being paid out from a savings account or bond is greater than the prevailing inflation figure.

According to Moneyfacts Compare, 80% of the UK’s savings accounts pay interest at above-inflation rates.

The MPC’s next rate-setting decision takes place on 9 May 2024.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Yesterday, we saw inflation drop to 3.4%, the lowest level seen since September 2021, but the journey to get there has not been plain sailing and there is still some way to go to reach the Bank’s 2% target.

“Wage growth continues to be a significant driver of inflation, particularly in the service sector, and though this is now slowing a little it will no doubt make this target harder to achieve. As such, the Bank has reiterated that it will maintain its data dependent resolve until it is satisfied that inflation has come down far enough and will not see a further spike.”

Nicholas Hyett, investment manager at Wealth Club, said: “The market was already anticipating that rate cuts wouldn’t start until the second half of the year, and there’s little in these numbers to change that perception.

“So what will ultimately trigger a change of course? We suspect that central banks around the world are waiting on the US Federal Reserve to set the pace. Once the Fed starts to cut, currency movements will likely force others to follow suit. As in so many other areas of public life, where the US leads, the UK will follow.”

Shaun Port, managing director of savings at Chase UK, said: “The decision to hold interest rates is welcome news for savers hoping to make the most of inflation beating interest on savings accounts. However, it’s a good idea to shop around as we’re starting to see some cuts to the rates on offer in anticipation of future rate cuts by the Bank of England.”

20 March: Fed Holds Rates Ahead Of Bank Rate Announcement

UK annual inflation fell by more than expected to 3.4% in February this year, its lowest since autumn 2021 and down from the 4% where it had been stalled since last December, writes Andrew Michael.

The announcement will strengthen arguments for the Bank of England to start cutting interest rates, with it having made significant progress in bringing down what has been a sustained period of rising prices.

Today’s Consumer Prices Index, from the Office for National Statistics (ONS), shows that prices rose by 0.6% last month, compared with a rise of 1.1% in February 2023.

Core CPI, which omits volatile data covering energy, food, alcohol and tobacco, stood at 4.8% in the year to February this year, down from 5.1% a month earlier.

CPI including owner-occupier costs (CPIH) rose by 3.8% in the 12 months to February this year, compared with 4.2% in January. On a monthly basis, CPIH rose by 0.6% in February, compared with a rise of 1% for the same month last year.

The Federal Reserve has today held interest rates in a range between 5.25% and 5.5%, with the strength of the US economy reinforcing its desire to wait before implementing cuts, writes Andrew Michael.

Explaining its reasons, the Fed said: “Recent indicators suggest the economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

“In considering any adjustments to the target range… [we] will assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%.”

Earlier this month, official figures showed that annual headline US inflation had nudged up to 3.2% in the year to February 2024, from 3.1% a month earlier.

The ONS said the largest downward contributions to the monthly change in the annual CPI and CPIH rates came from food and restaurants and cafes. This was offset by rising prices for housing and household services and motor fuels.

Grant Fitzner, ONS chief economist, said: “Inflation eased in February to its lowest rate for nearly two and a half years. Food prices were the main driver of the fall, with prices almost unchanged this year compared to a large rise last year, while restaurant and café price rises also slowed.

“These falls were only partially offset by price rises at the pump and a further increase in rental costs.”

The Bank of England, which is mandated by the government to keep long-term UK inflation at 2%, has maintained interest rates at their 15-year high of 5.25% since August last year.

Tomorrow, the Bank’s Monetary Policy Committee makes its latest pronouncement on borrowing costs. The strong expectation is that the influential Bank Rate will remain unchanged for the eighth month in a row from its 16-year high of 5.25%.

But today’s news offers hope that the UK’s central bank could start to bring down interest rates in the summer.

Alice Haine, personal finance analyst at Bestinvest, said: “Naturally, most households would welcome an interest rate cut tomorrow, but the BoE is expected to keep interest rates at the current level for the fifth successive meeting following 14 consecutive increases between December 2021 and August 2023. With the first rate cut not expected until the summer, all eyes are pinned on what the central bank has to say to see if there are any hints of earlier action.”

Lindsay James, investment strategist at Quilter Investors: ““With signs that the UK has already returned to a modest level of growth despite interest rates remaining high, this inflation reading will give confidence to the Bank of England that inflation is now coming to heel.

“As it looks likely to fall further in coming months, with the 12% cut to the energy price cap kicking in from April, the Bank’s monetary policy committee will be under further pressure to consider rates cuts sooner rather than later.”

Tom Stevenson, investment director at Fidelity International, said: “Inflation is likely to continue dropping through the spring as cheaper gas and electricity from April drives household energy costs lower. The key unanswered question is whether, and by how much, price growth bounces back from target in the second half of the year.”

12 March: UK Updates To Follow Next Week

Today’s US inflation figures show prices rising by a headline rate of 3.2% in the year to February, a shade up from the 3.1% annual rise recorded in January, while month on month the increase was 0.4%, up from 0.3%.

The core annual rate, which excludes notoriously volatile food and energy prices, fell to 3.8% from 3.9%, with the core monthly rate unchanged at 0.4%.

Inflation figures in national economies are used by central banks such as the Federal Reserve (Fed) in the US and the Bank of England to determine interest rate policy. 

The relatively modest uptick in the US headline rate is expected to deter the Fed from reducing rates before June at the earliest – they are currently in the range 5.25% to 5.5%. Previously, commentators had believed a cut this month might have been forthcoming (the Fed’s next announcement is due on Wednesday 20 March).

In the UK, the latest inflation rate announcement from the Office for National Statistics is also due on Wednesday next week, with the Bank of England’s latest decision on its Bank Rate due the following day.

UK inflation is currently 4% a year, with the Bank Rate of 5.25% unchanged since last August. There is little expectation of a Bank Rate cut this month, especially given today’s figures from the US.

That said, in his Budget speech last week, the Chancellor Jeremy Hunt said he expects UK inflation to fall to the Bank of England’s target of 2% “in the next few months”, which would suggest a subsequent reduction in the Bank rate at some point in the summer.

If mortgage lenders grow confident that the Bank Rate will be cut, we are likely to see reductions in the cost of borrowing for house-buyers, although there will also likely be cuts in the interest rates paid to savers.

14 February: Bank Will Seek Better News Before Acting

UK inflation was 4% in the year to January, unchanged on December 2023, writes Andrew Michael.

While this was lower than market expectations of an increase to 4.2%, it still reduces the likelihood of an interest rate cut by the Bank of England before the summer.

Today’s Consumer Prices Index (CPI) from the Office for National Statistics shows that prices fell by 0.6% in January itself, the same rate as January 2023.

Core CPI, which leaves out volatile data relating to energy, food, alcohol, and tobacco, rose by 5.1% in the year to January 2024, compared with a figure of 5.2% recorded a month earlier.  

CPI including owner-occupiers’ costs (CPIH) rose by 4.2% in the 12 months to January 2024, the same rate as a month earlier. On a monthly basis, CPIH fell by 0.4% in January, the same rate as January last year.

The ONS said the largest contribution to the monthly change in both the CPI and CPIH rates came from housing and household services, mainly through higher gas and electricity charges (the energy price cap rose by 5% on 1 January). These were offset by falls in the cost of furniture and household goods, food, and non-alcoholic drinks.

Grant Fitzner, ONS chief economist, said: “Inflation was unchanged in January, reflecting counteracting effects within the basket of goods and services.

“The price of gas and electricity rose at a higher rate than this time last year due to the increase in the energy price cap, while the cost of second-hand cars went up for the first time since May.

“Offsetting these, prices of furniture and household goods decreased by more than a year ago and food prices fell on the month for the first time in over two years. All of these factors combined resulted in no change to the headline rate.”

The Bank of England, which is required by the government to maintain long-term UK inflation at 2%, has kept interest rates on hold at a 15-year high of 5.25% since August 2023.

Earlier this month, the Bank’s rate-setting Monetary Policy Committee maintained a cautious tone, saying it needs more evidence that inflationary pressures have eased before it will consider bringing down borrowing costs. The next Bank Rate announcement is on 21 March.

Neil Birrell, chief investment office at Premier Miton Investors, said: “Unlike the US [see story below], inflation in the UK has come in a little better than expected in January. This will be taken as good news by those looking for rate cuts sooner rather than later, as it supports the view that inflation is heading back towards target. 

“However, the Bank of England is still unlikely to be driven into any decisions that will risk the journey back towards its target being jeopardised.”

Alice Haine, personal finance analyst at Bestinvest, said: “Many households will have started 2024 feeling financially squeezed with pandemic savings used up and significantly higher living costs compared to just a few years ago. 

“Once again, the uncertain economic climate signals that spending should remain constrained and emergency funds kept topped-up to ensure households survive any further financial shocks.”

13 February: Modest Fall Dashes Hopes Of Spring Rate Cut

Headline US inflation dipped to 3.1% in the year to January 2024 – a smaller fall than forecast – reducing the chances of an early reduction in borrowing costs across the Atlantic, writes Andrew Michael.

The UK inflation figures for January will be published tomorrow (Wednesday). The figure for the year to December was 4%.

Today’s official figures from the US Bureau of Labor Statistics show that its Consumer Price Index (CPI) for All Urban Consumers measure rose by 0.3% in January itself, slightly more than the 0.2 percentage point increase recorded in December 2023.

Explaining the data, the Bureau said that shelter (rental) costs continued to rise in January, contributing more than two-thirds of the monthly all-items increase. Food prices also increased last month, although the overall effect of these two elements was offset by a fall in energy prices prompted by a decline in the cost of fuel in January.

According to the Bureau, core CPI, which omits volatile food and energy prices, rose by 0.4% in January, compared with a 0.3 percentage point increase a month earlier.

The Bureau added that, over the year to January this year, core CPI, which is regarded as a reliable pointer to longer-term inflation trends, rose by 3.9%, the same level as reported a month earlier. Market watchers had been expecting a core CPI figure of 3.8% and a headline CPI figure of 2.9%.

The US Federal Reserve, like its UK equivalent of the Bank of England, is required to keep inflation at 2% over the medium to long-term. Last month, it left borrowing costs unchanged at a 23-year high in a range between 5.25% and 5.5%.

Economists and investors are watching to see how soon the Fed, responsible for the borrowing costs of the world’s largest economy, will start to bring down interest rates. 

Having quelled a sustained period of inflation with its aggressive stance on monetary policy for the past two years, the expectation was that interest rates could begin to move downwards this Spring, heralding a series of quarter-point percentage rate cuts during the remainder of 2024.

But with inflation still well above target, coupled with resilient economic data since the start of the year – in the US jobs market, for example – the counter argument has been that a premature easing of borrowing costs will only exacerbate the potential for renewed inflationary pressures further down the line.

The next Fed announcement is due on 20 March, with the next Bank of England rate call the following day.

Michele Morra, portfolio manager at Moneyfarm, said: “US CPI has come out much stronger than expected, in a material blow to investors anticipating a spring rate cut. The rise in the core CPI will be a headache for the Fed, particularly as the data showed a monthly rise of 0.4%, which amounts to the biggest rise since May 2023.

“We can expect the Fed to emphasise the need for prudence and data-dependent decision-making to determine the appropriate timing and magnitude of any future policy moves. This approach would reflect a balance between the need to address disinflationary pressures, while also ensuring that policy actions are well-calibrated to support the Fed’s dual mandate of maximum employment and stable prices.”

Neil Birrell, chief investment officer at Premier Miton Investors, said: “We are well beyond just looking at the actual rate of inflation and are now focusing on the level of disinflation across goods and services, but it looks like everything is running hotter than hoped for.

“The Fed will feel vindicated in the language it has been using around rates cuts, as there can be little doubt that they are being pushed further out. We are not at the stage of worrying about inflation reaccelerating, but we are not out of the woods yet either.”

1 February: Cuts Expected From Summer Onwards

The Bank of England has, as expected, held its Bank Rate at 5.25% for the fourth time in a row, leaving it unchanged since August last year, writes Andrew Michael.

The Bank’s Monetary Policy Committee voted by six votes to three to maintain the Bank Rate at a 16-year high. Of the three unsuccessful votes cast, two were in favour of hiking the Bank Rate to 5.5%, while one favoured reducing borrowing costs to 5%.

Today’s announcement aligns with recent decisions by other central banks such as the US Federal Reserve and the European Central Bank (see stories below).

The announcement means that millions of borrowers on variable rate and tracker mortgages and loans should see no direct impact on their repayments, although lenders are free to increase variable rates if they choose.

New borrowers and those coming to the end of fixed deals and needing to remortgage this year – over one million borrowers – will be watching closely to see how lenders react to today’s announcement.

Today’s news also means that savers are able to receive a ‘real’ return on cash held in bank and building society accounts, provided they track down the best deals. A real return is obtained when the interest being paid out from a savings account or bond is greater than the prevailing inflation figure, which at the moment is 4%.

The top-paying fixed interest bonds are paying over 5%, according to our savings partner Raisin, with over 40 such accounts paying over 4%. However, money needs to be locked away for periods starting at six months to qualify for such a rate.

Explaining its decision, the Bank of England said that, since its last rate-setting decision in December, global economic growth had remained “subdued”, while acknowledging that activity “continues to be stronger in the US”.

The Bank added that, while wholesale energy prices have fallen significantly, “material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea”.

Along with other central banks, the Bank of England is required to maintain inflation at 2% over the medium to long-term.

In a bid to head off soaring inflation levels that beset the UK economy through 2022 and much of last year the Bank raised borrowing costs 14 times in a row between December 2021 and August 2023 in the most aggressive bout of monetary policy tightening since the 1980s.

Financial markets think that the Bank will lower borrowing costs in quarter percentage point increments between four and five times this year starting in June.

The MPC’s next rate-setting decision takes place on 21 March.

Rob Morgan, chief investment analyst at Charles Stanley, said: “Although inflation pressures show clear signs of easing, the Bank remains keen to keep a tight grip and leave rates in restrictive territory while it gains more confidence that price rises are thoroughly vanquished.

“Central banks on both sides of the Atlantic are slowly, but surely, stuffing the inflation genie back in the bottle. Following a period of restrictive interest rates to quell the flames of price rises, inflation is melting away and 2024 is the year of the ‘pivot’ when they can turn their attention to when to cut rather than worrying whether they might raise them further.

“This is easier said than done as monetary policy acts with an unpredictable lag, which presents a double-edged risk: slash rates too soon and inflation might creep back, but cut too later and there may be more economic damage.

Dean Butler, managing director for retail direct at Standard Life, said: “It remains unlikely that interest rates will fall close to, or below, inflation this year meaning people considering boosting their savings might find themselves in a sweet spot through 2024 with returns beating price rises. 

“The highest earning easy-access savings accounts currently offer rates of about 5% meaning that a £10,000 savings pot in a best-buy account could be worth £10,588 in real terms after two years.”

31 January: Bank Of England Announcement Tomorrow

The US Federal Reserve has today kept borrowing costs at a 23-year high, as strong growth in the national economy reinforces policy setters’ views that they should wait before cutting interest rates, writes Andrew Michael.

The announcement from the Federal Open Market Committee (FOMC), means that the Fed’s target benchmark interest rates continue in a range between 5.25% and 5.5%.

The Bank of England Bank Rate decision follows tomorrow, when commentators expect the rate to remain at 5.25%, where it has stood since August last year.

Explaining the decision, the FOMC, whose members voted unanimously to keep rates at present levels, said: “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

“The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.

However, the Committee warned that: “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

Earlier this month, official figures showed that annual headline US inflation rose by more than expected in December 2023 to stand at 3.4%, up from 3.1% recorded in November.

Along with other major central banks worldwide, such as the Bank of England and the European Central Bank (ECB), the Fed is required to maintain inflation at 2% over the medium to long-term. To achieve this, the main tool that central banks have at their disposal is the ability to raise and lower borrowing costs.

During both 2022 and last year, central banks embarked on aggressive rounds of interest rate hiking to head off soaring inflation levels brought on by a toxic mix of economic conditions, including Russia’s invasion of Ukraine and post-pandemic supply chain bottlenecks.

The economic medicine worked, with inflation across major economies dropping sharply from double-digit levels reached in the fourth quarter of 2022. But the concern for rate-setters now is that a premature reduction in borrowing costs could result in a re-emergence of inflationary pressures.

Richard Flynn, UK managing director at Charles Schwab, said: “Investors appear to be fairly confident that the Fed is soon to pivot away from restrictive interest rate policy and towards rate cuts, but the timeline for this remains unclear: “Hopes for slashes by spring are diminishing, as recent stronger-than-expected economic data has tempered investors’ expectations around the Fed’s moves.”

Danni Hewson, head of financial analysis at AJ Bell, said: “Investors want clarity from the Fed. They want to be sure the path to a pivot is on track and that a resilient US economy won’t allow those around the table to take more time than markets are anticipating to flip the switch.”

Last week, the ECB, the Fed’s equivalent covering Eurozone countries, also held interest rates, leaving its main refinancing rate at an all-time high of 4.5% (see story below).

Seema Shah, chief global strategist at Principal Asset Management, said: “After a month characterised by a flurry of strong economic data but moderating price pressures, it is not surprising that the Fed is reluctant to provide forward guidance for rate cuts.

“Strong labour market and economic activity data is inevitably inserting some hesitation into their projections. Inflation improvement has been considerable, but as long as the underlying economy is so robust, the risk of renewed inflation pressures cannot be ignored.”

Whitney Watson, co-head and co-chief investment officer of fixed income and liquidity solutions for Goldman Sachs Asset Management, said: “The Federal Reserve has shifted its stance from a hiking bias to a data-dependent approach. With steady economic growth, it is expected that policymakers will wait for more evidence of a sustained downtrend in inflation before making any changes.

“For investors, now is the time to secure attractive yields on high-quality bonds to earn attractive income and position for rate relief as central bank policy rates look set to end the year lower for the first time in two years.”

25 January: ECB Holds Euro Borrowing Costs

The European Central Bank (ECB) has today held borrowing costs across the Eurozone for the third consecutive time, leaving its main refinancing rate at 4.5%, an all-time high, writes Andrew Michael.

Its marginal lending facility stays at 4.75%, with the deposit rate at 4%.

The ECB said prevailing data “broadly confirmed” its previous assessment of the medium-term economic outlook: “Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions.

“Tight financing conditions are dampening demand, and this is helping to push down inflation.”

Along with other central banks such as the Bank of England and the US Federal Reserve, the ECB is required to maintain inflation at 2% over the medium- to long-term.

The Bank of England will reveal its latest Bank Rate decision on 1 February. The Federal Reserve will announce its decision on 31 January.

The ECB last raised interest rates in September 2023, the tenth consecutive hike, in response to soaring inflation levels that peaked at 10.6% across the trading bloc in October 2022.

In the year to December 2023, Eurozone inflation stood at 3.4%, considerably above target. This compared with a reading of 4% in the UK and 3.4% in the US.

In line with today’s announcement, markets expect the UK and US central banks to maintain borrowing costs at their present rates.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The ECB has once again held interest rates, reiterating its reluctance to begin making cuts despite ever-mounting pressure to do so.

“Markets have been anticipating cuts to begin as early as the spring, but the ECB appears fearful that cutting rates too soon could do more harm than holding them higher for too long. However, the weakening economic outlook will be of grave concern and could prompt a move towards cuts sooner than the ECB might have hoped in an attempt to stimulate growth.”

17 January: Inflation Creeps Back Up To 4% In December

The annual rate of inflation nudged up from 3.9% in November to 4% in December, reversing a recent downwards trend and reducing the likelihood that borrowing costs will come down in the coming months, writes Andrew Michael.

Today’s Consumer Prices Index (CPI), from the Office for National Statistics (ONS) shows that CPI rose by 0.4% last month, the same rate of increase as December 2022.

Core CPI, which omits volatile data for energy and food, rose by 5.2% in the year to December, the same rate as November.

CPI including owner-occupiers’ costs (CPIH) rose by 4.2% in the 12 months to December 2023, the same figure as a month earlier.

The ONS said the largest upward influence to changes in both the CPI and CPIH came from rising prices for alcohol and tobacco. These were offset by falls in the cost of food and non-alcoholic drinks.

Grant Fitzner, ONS chief economist, said: “The rate of inflation ticked up a little in December, with rises in tobacco prices due to recently introduced duty increases. These were partially offset by falling food inflation, where prices still rose but at a much lower rate than this time last year.

“The prices of goods leaving factories are little changed over the last few months, while the costs of raw materials remain lower than a year ago.”

Before Christmas, the Bank of England, which is tasked by government to keep long-term UK inflation at 2%, left interest rates on hold at a 15-year high of 5.25%. The next Bank Rate announcement will be on 1 February,  with commentators increasingly sceptical about the likelihood of a reduction in interest rates.

Following a downward trajectory in recent months, today’s inflation figure now stands at double the Bank’s target and is higher than the equivalent numbers for either the US (3.4%) or the eurozone (2.9%).

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Though today’s increase does not take the figure drastically higher, it shows that the UK’s battle against inflation is not yet over and the situation remains precarious.

“Not only has the headline rate of inflation seen an unwanted uptick, but core CPI still remains relatively high. Core inflation has been falling much more gradually than the headline figure and progress here is likely to be slow. So the Bank of England may resist making rate cuts until it returns to a more palatable level.”

Dean Butler, managing director for retail direct at Standard Life, said: “With January cheer in short supply, the impact of inflation moving further from the Bank of England’s 2% target will come as a blow to struggling households.

“It had seemed that the squeeze on people’s finances had been slightly loosening, with lower inflation forecast and one of the UK’s largest lenders yesterday lowering their mortgage rates in anticipation of the Bank of England potentially lowering the base rate soon. However, we might now have to wait slightly longer for the pressure to ease.

“Hopefully this month’s figure is a blip, and we’ll see the forecasted fall in inflation soon. For those who are able to save, now’s still a good time to shop around for best-buy accounts.”

11 January: Federal Reserve Expected To Keep Powder Dry

Headline US inflation rose by more than expected to 3.4% in the year to December 2023, from 3.1% a month earlier, giving the Federal Reserve extra reason to keep borrowing costs at their present 22-year high when it reveals its next interest rate decision at the end of this month, writes Andrew Michael.

The US Bureau of Labor Statistics reported today that the Consumer Price Index (CPI) for All Urban Consumers rose by 0.3% last month, having fallen by 0.1 percentage points in November 2023.

Explaining today’s figures, the Bureau ascribed more than half of the increase in the monthly CPI figure to rising housing costs. Electricity and fuel prices also rose during December, more than offsetting a fall in the cost of natural gas.

According to the Bureau, core CPI, which leaves out volatile food and energy prices, rose 0.3% in December 2023, the same increase as a month earlier.

Over the year to December, the Bureau said that core CPI, which is regarded as a reliable gauge for longer-term inflation trends, rose by 3.9%, compared with 4% in the 12 months to November. Economists had expected a core CPI figure of 3.8% and a headline CPI figure of 3.2%.

The Federal Reserve, the US equivalent of the Bank of England, is mandated to maintain inflation at 2% over the medium to long-term. Last month, it left borrowing costs unchanged at a 22-year high, in a range between 5.25% and 5.5%.

One of the key questions being asked by the markets globally is how soon the Fed, responsible for the borrowing costs of the world’s largest economy, would start to reduce interest rates having adopted an aggressive stance on monetary policy over the past two years to tackle sustained and elevated levels of inflation.

Market watchers had hoped the Fed would start to ease borrowing costs as early as the spring, although today’s hiked inflation numbers may scupper that possibility.

Richard Flynn, managing director at Charles Schwab UK, said: “Today’s figures show an increase in the rate of inflation, a change that will likely be interpreted by the market as unwelcome, but unsurprising. 

“Recent higher than expected earnings growth set alarm bells ringing for many investors who are hoping for interest rate cuts. While strong activity in the jobs market is a sign of a healthy economy and is good for workers, it can also be a contributing factor to inflation, so this likely played into the price rises we have seen today.

“Inflation figures in recent months have been promising, and a single number is not a trend. But if today’s report is the start of an upward pattern, there is a good chance the Fed will delay rate cuts until later than previously expected. It looks like the market may have jumped the gun in pencilling-in as many as six Federal Reserve rate cuts in 2024.”

The Federal Reserve decision on interest rates will be announced on 31 January. The Bank of England’s latest Bank Rate announcement will follow on 1 February (the current rate is 5.25%).

20 December: Inflation At 3.9% May Accelerate Bank Rate Cut

The annual rate of inflation plunged more than expected to 3.9% in November this year according to official figures, offering hope that interest rates could start to come down sooner than expected in 2024, writes Andrew Michael.

Today’s Consumer Prices Index (CPI), from the Office for National Statistics (ONS), fell more abruptly than economists’ predictions of 4.3%. and stands at its lowest level for more than two years.

The ONS added that, on a monthly basis, CPI rose by 0.2% month-on-month to November, compared with a rise of 0.4% 12 months ago.

Core CPI, which leaves out volatile data covering energy and food, rose by 5.1% in the year to this November, down from 5.7% a month earlier.

CPI including owner occupiers’ costs (CPIH) rose by 0.1% in the year to November 2023, down from a 0.4% rise recorded 12 months earlier.

The ONS said that the largest downward contributions to the change in both the CPI and CPIH  annual rates came from transport, recreation and culture, and food and non-alcoholic drinks.

Grant Fitzner, ONS chief economist, said: “Inflation eased again to its lowest annual rate for over two years, but prices remain substantially above what they were before the invasion of Ukraine.

“The biggest driver for this month’s fall was a decrease in fuel prices after an increase at the same time last year. Food prices also pulled down inflation, as they rose much more slowly than this time last year. There was also a price drop for a range of household goods and the cost of second-hand cars.”

Last week, the Bank of England, which is required by government to maintain long-term UK inflation at 2%, left borrowing costs unchanged at a 15-year high of 5.25% for the third consecutive month (see story below).

Although today’s inflation figure remains almost twice the size of its target level, commentators were increasingly hopeful that the Bank would be able to meet its mandate without causing a hard economic landing in the process.

Yesterday (Tuesday), the Eurozone annual CPI inflation figure came in at 2.4%, its slowest rate in two years. Core inflation, for the trading bloc covering the 20 countries whose common currency is the euro, fell to 3.6%

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Compared to last year, there has recently been a sense of cautious optimism in the air and this morning’s inflation figure of 3.9% adds to this. The Bank of England now certainly faces a less daunting task in steering inflation back to its 2% target next year, without necessitating a deep recession.

“This further decline in the pace at which prices are rising offers a glimmer of relief for households grappling with rising living costs.”

James McManus, chief investment officer at Nutmeg, said: “While energy prices are well below last year’s levels, food prices, which have slowed according to today’s data, are still 9% higher than a year ago. So, food inflation, perhaps one we all feel most acutely in our weekly shops or eating out bills, still needs to come down dramatically.

“Together with the wages picture, there is plenty for the Bank of England to chew over on the inflation front.”

14 December: Euro Central Bank Also Freezes Rates

The Bank of England has held its Bank Rate untouched at 5.25% for the third time in a row, Andrew Michael writes. It reached this level in August 2023.

In a widely expected move that echoed yesterday’s decision by the US Federal Reserve to keep rates on hold (see story below), the Bank’s Monetary Policy Committee (MPC), voted by six votes to three to maintain the influential rate at a 15-year high of 5.25%.

Each of the three dissenting voices within the MPC voted for a hike in the rate of 0.25 percentage points to 5.5%.

Explaining its decision, the Bank said: “Since the MPC’s previous decision, consumer price index inflation has fallen back broadly as expected, while there has been some downside news in private sector regular average weekly earnings growth.

“However, key indicators of UK inflation persistence remain elevated. Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target in the medium term, in line with the Committee’s remit.”

Inflation stood at 4.6% in October, according to the Office for National Statistics. The November figure will be published next week.

The next official Bank Rate announcement will be made on 1 February 2024.

Today’s announcement by the Bank of England, its last rate-setting decision of 2023, will provide partial relief to millions of mortgage customers and other borrowers on variable rate and tracker-based loans.

This year has been a challenging one for both prospective and existing mortgage borrowers, facing affordability pressures from higher interest rates and the ongoing cost-of-living crisis, as well as house prices still at elevated levels relative to income.

Between December 2021 and August this year, the Bank, in the face of soaring inflation, hiked borrowing costs 14 times in a row in a bid to head off rising prices, which peaked at an annual rate of 11.1% in October 2022 before falling to its current level.

The Bank’s decision also means that savers are able to receive a ‘real’ return on cash that’s held in bank and building society accounts, provided they track down the best deals. A real return is when the interest rate being paid out is greater than the prevailing inflation figure.

Despite the welcome fall in inflation, the UK figure remains elevated when compared with official data from both the US and the Eurozone where prices are rising on an annual basis by 3.1% and 2.4% respectively. UK inflation also stands at more than double the 2% long-term target commonly adopted by central banks worldwide.

As interest rates at home and abroad level off and inflation risks recede, the next decision for monetary policymakers is how long they will maintain borrowing costs at present rates and what scope, if any, there is to start cutting them.

Explaining its decision yesterday to keep interest rates on hold, Fed chair, Jay Powell, gave markets the clearest signal yet that a prolonged period of monetary tightening was over.

Global markets responded to his comments by climbing to multi-year highs. But Bank of England governor, Andrew Bailey, has warned repeatedly that it is too early to think about cutting rates.

Rob Morgan, chief investment analyst at Charles Stanley, said: “Although inflation pressures show clear signs of easing and the UK economy teeters on the edge of recession, the Bank is keen to keep a tight grip by keeping rates in restrictive territory.

“The Bank is conscious of going too far with raising rates and inflicting more pain than necessary on the economy, but ultimately its job is to bring inflation down to target. Just as squeezing the last bits of toothpaste out of the tube is more difficult, squeezing the remnants of unwanted inflation out of the system can be tricky, so it needs to maintain restrictive interest rates for a while longer.”

Karen Noye, mortgage expert at Quilter, said: “The Bank of England’s decision to maintain the interest rate at 5.25% is a significant move with multi-faceted implications for the UK economy. But, by and large, it should spell good news for mortgages and the housing market.

“For the housing market, this pause in interest rate hikes may boost confidence. More certainty over mortgage costs breeds higher buyer confidence and property market activity. More potential buyers should start to feel confident about entering the market, potentially sustaining or even boosting housing prices.

“Recent house price indices have shown that as a result of limited housing stock prices have modestly increased.”

The European Central Bank (ECB), in line with the Fed and the Bank of England, has also left its three key interest rates on hold.

Borrowing costs on its main refinancing option, marginal lending, and deposit facilities remain unchanged at 4.5%, 4.75% and 4% respectively.

Explaining its decision, the ECB said: “Underlying inflation has eased further. But domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.”

The ECB added that inflation is expected to decline gradually over the course of next year, before approaching its 2% target in 2025.

13 December: Elevated Inflation Remains Cause For Concern

The US Federal Reserve has, as expected, kept borrowing costs unchanged at a 22-year high, while indicating that it remains “highly attentive” to inflation risks and would be prepared to adjust its stance and contemplate increases if the economic outlook were to change, writes Andrew Michael.

Today’s announcement by the Federal Open Market Committee (FOMC), its last rate-setting decision of 2023, means the Fed’s target benchmark interest rates continue in a range between 5.25% and 5.5%.

The Bank of England will announce its Bank Rate decision at 12pm on 14 December. It is expected to hold the rate at 5.25%. The European Central Bank will also release its latest rates decision on the same day.

Earlier today, the latest tranche of economic data showed that US producer price inflation, which tracks the prices that businesses received for their goods and services, cooled by more than expected in November, supporting the FOMC’s decision to leave interest rates untouched.

The FOMC, whose members voted unanimously to maintain rates at present levels, said: “Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

The Fed’s interest rate decision follows yesterday’s official figures from the US Bureau of Labor Statistics which showed that US headline inflation dipped to 3.1% in November from 3.2% a month earlier.

As with other major central banks worldwide, the Fed is mandated to maintain inflation at 2% over the medium to long-term. Its next rate-setting announcement will be made on 31 January 2024.

Lindsay James, investment strategist at Quilter Investors, said: “The US economy continues to defy expectations, with jobs growth remaining remarkably robust and the economy continuing to expand.

“However, though annual headline inflation dipped to 3.1% in November, it remains well above the 2% target and core inflation saw an uptick in monthly figures, showing stubborn price pressures are not over yet. This could allow the Fed to maintain its higher for longer stance well into 2024.”

12 December: Bank Of England Expected To Follow Suit

Headline US inflation fell as expected to 3.1% in the year to November from 3.2% a month earlier, virtually guaranteeing that borrowing costs will be maintained at current levels when the Federal Reserve reveals its last interest rate decision of 2023 on Wednesday, writes Andrew Michael.

The Bank of England and European Central Bank announcements will follow on Thursday – both are expected to keep their respective lending rates unchanged.

The US Bureau of Labor Statistics reported today that the Consumer Price Index (CPI) for All Urban Consumers fell 0.1 percentage point in November 2023, having remained flat a month earlier. Explaining the figures, the Bureau said rental costs continued to rise in November, offsetting a fall recorded in fuel prices.

According to the Bureau, core CPI, which omits volatile food and energy prices, rose by 0.3% in November, following an increase of 0.2% a month earlier. Over the year to November, the Bureau said that core CPI, which is regarded as a bellwether for longer-term inflation trends, rose by 4%, the same as recorded in October.

The Federal Reserve, like the Bank of England, is mandated to maintain inflation at 2% over the medium- to long-term. Last month, it left borrowing costs unchanged at a 22-year high, in a range between 5.25% and 5.5%.

Following the publication of today’s figures, commentators are predicting that the Fed is likely to maintain interest rates at these levels when it makes its final pronouncement on the cost of borrowing tomorrow. 

The Bank of England’s Bank Rate has stood at 5.25% since August.

Tom Hopkins, senior portfolio manager at BRI Wealth Management, said: “US headline Inflation came in at 3.1% year-on-year for November 2023, in line with consensus expectations and the lowest reading in five months. More importantly, core inflation stood firm at 4% in November 2023, unchanged from last month but still the lowest since September 2021, matching market forecasts.

‘’Today’s reading should be taken positively by the market as it bolsters arguments for the Federal Reserve to keep interest rates at current levels when they meet for the final time this year tomorrow. 

“In recent weeks we’ve seen the market begin to price in anticipation of a policy shift early next year with the market currently pricing in a 40% probability of a rate cut as early as March 2024, which seems optimistic. The market has consistently mis-predicted the Fed’s path over the last two years and the risk is it could mis-predict again.”

Ryan Brandham, head of global capital markets, North America, at Validus Risk Management, said: “The figures for the US Consumer Price Index were largely as expected, with the month-on-month number coming in slightly higher.

“The market is already pricing in over four interest rate cuts in 2024. However, considering that core CPI remains at 4%, there is a risk that these cuts may not come as rapidly as the market expects. 

“The Fed needs to see a sustained decrease in inflation before taking significant action. Despite today’s release closely aligning with expectations, the market reaction may be muted today, as focus shifts to the upcoming rate-setting meeting tomorrow.”

30 November: Annual Figure Falls Towards Long-Term Target

Inflation in the bloc of 20 countries that use the euro currency is expected to stand at 2.4% in the year to November, down from the 2.9% recorded in October.

The European Central Bank, in common with other central banks such as the Bank of England, is tasked with keeping inflation at 2%. Annual inflation in the UK in October fell to 4.6% from 6.7% the previous month.

The November figure for the eurozone – a flash estimate from the EU’s statistical office, Eurostat – is below general expectations, and suggests that an interest rate cut might be in the offing to forestall the threat of recession in the trading bloc.

There were falls in the rate of inflation for food, alcohol and tobacco (from 7.4% to 6.9%), services (from 4.6% to 4%) and non-energy industrial goods (from 3.5% to 2.9%). Energy prices continued to fall, with an inflation rate of minus 11.5% compared to minus 11.2% in October.

Forecasts for wholesale energy prices suggest that they might rise in the coming weeks, especially if the weather proves particularly cold and demand rises as a result. Any uptick in retail energy prices could therefore reduce the rate at which inflation is falling.

The energy price cap in the UK, which limits how much suppliers can charge per unit of energy and for standing charges, will increase by 5% from £1,834 to £1,928 a year for a typical household from 1 January 2023.

The euro area consists of Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.

15 November: All Eyes On Next Week’s Autumn Statement

The annual rate of inflation fell sharply to 4.6% in October this year from 6.7% a month earlier according to official figures, reducing the chance of a further rise in borrowing costs by the Bank of England before the end of 2023, writes Andrew Michael.

Today’s Consumer Prices Index (CPI) from the Office for National Statistics (ONS) dropped to the lowest rate in nearly two years. On a monthly basis, the rate did not change in October 2023, compared with a rise of 2% for the same month last year, attributed largely to a spike in energy costs.

The ONS also reported that ‘core’ CPI, which omits volatile data relating to energy and food, rose by 5.7% in the 12 months to October this year, down from 6.1% in September.

CPI including owner occupiers’ housing costs (CPIH) rose by 4.7% in the year to October, down from 6.3% a month earlier.

Today’s announcement means that Prime Minister Rishi Sunak’s aim of halving inflation before the end of 2023 has been achieved.

Grant Fitzner, ONS chief economist, said: “Inflation fell substantially on the month as last year’s steep rise in energy costs has been followed by a small rise in the energy price cap [a limit on the amount that energy suppliers can charge UK households] this year.”

“Food prices were little changed on the month, after rising this time last year, while hotel prices fell, both helping to push inflation to its lowest rate for two years.

“The cost of goods leaving factories rose on the month. However, the annual growth was slightly negative, led by petroleum and basic metal products.”

The Bank of England, which is required by government to maintain long-term UK inflation at 2%, will weigh up today’s news, along with yesterday’s official figures which showed that wages, at 7.7%, continued to grow at one of the fastest rates on record, before it decides what to do next with the Bank Rate.

This currently sits at a 15-year high of 5.25%, affecting borrowers and savers alike. The Bank’s next decision will be announced on 14 December.

All eyes will turn next to the Autumn Statement on 22 November where rumours have been swirling for several days about potential changes to the UK’s regime on individual savings accounts (ISAs) and inheritance tax.

Lindsay James, investment strategist at Quilter Investors, said: “The Prime Minister will be breathing a deep sigh of relief today, especially given the political events of the last few days. Halving inflation was meant to be the easiest of his five priorities to achieve as it was a year-on-year comparison, and 2022 saw inflation rise sharply.

Although things got a little close for comfort, today’s sharp drop in inflation to 4.6% is a positive step on the long road back to target levels. However, this has been predominantly driven by factors that look unlikely to be repeated in the months ahead.

“Energy prices are the most significant contributor to the fall. Whilst this headline data will on the face of it be welcome news for the Bank of England’s rate-setting Monetary Policy Committee, it will want to see more evidence of slowing inflation across the economy, rather than it coming primarily from fluctuations in international energy markets. 

“With core CPI falling more gradually, now at 5.7% and down from 6.1% in September, it is clear that further progress towards the target of 2% is likely to be relatively slow.”

14 November: Market Expects Fed To Hold Rates In December

Headline US inflation fell to 3.2% in the year to October 2023 from 3.7% a month earlier, reducing the likelihood of an interest rate hike by the Federal Reserve at its final meeting of the year on 13 December, writes Andrew Michael.

The US Bureau of Labor Statistics reported today that the Consumer Price Index (CPI) for All Urban Consumers was unchanged in October, having increased by 0.4 percentage points in September this year.

Explaining the latest figures, the Bureau said that housing costs continued to rise in October, offsetting a decline in fuel prices “resulting in the seasonally adjusted index being unchanged over the month”.

According to the Bureau, core CPI, which strips out volatile food and energy prices, rose 0.2% in October this year, having risen by 0.3% the previous month. However, over the year to October 2023, the Bureau said that core CPI rose by 4%, the smallest 12-month uptick since September 2021.

The Federal Reserve, the US equivalent of the Bank of England, left borrowing costs untouched earlier this month at a 22-year high in a range between 5.25% and 5.5%

Last week, Fed chair, Jay Powell, stressed that policymakers would not be “misled by a few good months of data”. He warned that the central bank could again hike rates, even though officials have shown little appetite for raising borrowing levels from their present levels.

As with other central banks, the Fed is mandated to maintain long-term inflation at a level of 2%.

After today’s figures from the US, attention will turn to the latest UK inflation figure, out tomorrow. Last month, the Office for National Statistics reported the annual rate of inflation to September 2023 at 6.7%, unchanged from a month earlier.

Lindsay James, investment strategist at Quilter Investors, said: “Today’s inflation data in the US has offered a further signal that the Federal Reserve’s work on interest rates is probably done, even though official indications keep another rate rise this year on the table. Although core inflation is currently declining only slowly, there are increasing signs this will speed up in early 2024 amid a softening economic backdrop.”

Richard Flynn, managing director at Charles Schwab UK, said: “The drop in inflation suggests that recent monetary policy has been doing its job. This good news reinforces the likelihood that central bankers will hold off from further rate hikes in this cycle.”

2 November: Focus Switches To Chancellor’s Autumn Statement

The Bank of England has left borrowing costs untouched for the second time in a row, as monetary policymakers around the world press pause in their fight against inflation, writes Andrew Michael.

In a widely expected move, the Bank’s Monetary Policy Committee (MPC), voted 6-3 to maintain the Bank Rate at a 15-year high of 5.25%. The three in the minority voted to increase the Rate to 5.5%.

Today’s announcement repeats September’s decision, which brought to an end a run of 14 consecutive interest rate rises that stretched back to December 2021.

The news will provide relief to more than a million borrowers with variable rate and tracker mortgages who, until last month, had been battered by a series of rising home loan costs lasting nearly two years.

Explaining the move, which follows on from similar decisions by the US Federal Reserve and the European Central Bank (see stories below), the Bank said: “Since the MPC’s previous decision [in September 2023], there has been little news in key indicators of UK inflation persistence.

“There have continued to be signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally.”

Interest rate-setters must now decide for how long they are willing to keep a cap on borrowing costs, whether there will be a need to hike rates further, or whether recent decisions mark a turning point which will see rates move down.

The UK’s annual rate of inflation remained unchanged at 6.7% in September, considerably higher than the comparable US figure of 3.7%, or yesterday’s initial estimate for the Euro Area, which showed that prices rose by just 2.9% across the euro trading bloc in the year to October 2023.

Although UK inflation has fallen steadily since peaking at 11.1% in October last year, the latest figure remains well above the long-term 2% target. The Bank says it expects inflation to fall further this year to around 4.5% before continuing to fall further in 2024.

The next Bank Rate decision will be on 14 December. Before then, on 22 November, the Chancellor, Jeremy Hunt, will deliver his Autumn Statement.

Rob Morgan, chief investment analyst at Charles Stanley, said: “Cracks have been appearing in the economy and the jobs market, and many inflation indicators are moving downwards as expected, so the Bank can justifiably adopt a wait-and-see stance at this point.

“With inflation well above the 2% target and wage growth still elevated, a further rate hike cannot be ruled out in the coming months, but the more likely scenario is that we have already reached the interest rate summit and a long plateau awaits before the descent begins.”

Emma Mogford, fund manager, Premier Miton Monthly Income Fund, said: “I feel increasingly confident we are now at peak rates. The rapid increase in interest rates in the last year will continue to bring down demand for goods and services and hence inflation, which the Bank of England expects to be back at 2% in two years. If inflation can fall while the economy is resilient, that should be good for UK equities.”

Dean Butler, managing director for retail direct at Standard Life, said: “The Bank of England’s decision to hold the base rate again will come as welcome relief to people facing another difficult winter. Households approaching the end of a fixed mortgage term will be particularly glad of the respite.

“There’s also some good news for people in a position to save. It looks like rates might be peaking, however there’s no sign they’ll start to fall anytime soon, and best buy fixed cash savings accounts are currently sitting between 5.5% and 6%. With inflation forecast to fall to around 5% by 2023, cash savings might start to outpace price rises for the first time in a long while.”

1 November: All Eyes Switch To Bank Of England Tomorrow

The US Federal Reserve has, as expected, held borrowing costs untouched at a 22-year high while retaining the potential for future increases in its ongoing fight against inflation, writes Andrew Michael.

Today’s announcement by the Federal Open Market Committee (FOMC) means the Fed’s target benchmark interest rates continue in a range between 5.25% and 5.5%.

The Bank of England, the Fed’s UK equivalent, reveals its latest Bank Rate decision tomorrow (Thursday). It is also expected to keep UK borrowing costs at their present rate, 5.25%, which would be the third time in a row at this level.

The FOMC, whose members voted unanimously to maintain rates, said: “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of income information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge.”

The Fed’s interest rate decision follows the publication of recent official data which showed that US inflation stood at 3.7% in the year to September 2023.

This is significantly lower than the most recent figure of 6.7% recorded in the UK, but higher than yesterday’s initial estimate that showed prices rose by just 2.9% across the euro trading bloc in the year to October 2023. Each of the respective central banks has an inflation target of 2%.

With ongoing tensions in the Middle East threatening to send the oil price spiralling and reignite inflationary pressures, market watchers say rate-setters remain cautious about future decisions involving borrowing costs.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Today’s decision by the Fed to maintain interest rates underscores the complexities of the current US economic landscape. Despite the economy defying expectations with robust job growth and economic expansion, the inflation rate remains well above its 2% target. Analysts will be keenly observing each subsequent data release, sifting for indications of the Fed’s future direction.

“With consumer giants like McDonald’s and Amazon surpassing earnings expectations and a potential of around $1 trillion of pandemic-era savings still available to drive consumption, the inflationary pressure remains palpable.”

26 October: Bank Of England, Fed Expected To Hold Rates

The European Central Bank (ECB) has, as expected, halted a run of 10 consecutive interest rate rises across the eurozone by leaving borrowing costs untouched, writes Andrew Michael.

Today’s announcement means the central bank’s main refinancing rate remains at 4.5%. Its marginal lending facility stays at 4.75%, with the deposit rate at 4%.

Explaining its decision, the ECB said inflation “dropped markedly in September… and most measures of underlying inflation have continued to ease.”

It added that its programme of monetary tightening that began last year “continues to be transmitted forcefully into financing conditions” and that “this is increasingly dampening demand and thereby helps push inflation down.”

Consumer prices in the 20 countries that share the euro rose by 4.3% in September 2023, down from 5.2% a month earlier, and the lowest rate of growth recorded across the trading bloc since October 2021.

Along with other central banks, such as the Bank of England and the US Federal Reserve, the ECB is required to maintain inflation at 2% over the medium to long term.

The Bank and the Fed announce their latest interest rate decisions next week. Both decided to hold borrowing costs at current levels at their most recent rate-setting meetings, and the markets are forecasting that this will continue to be the case when their respective announcements are made.

The decision to hold the UK Bank Rate at 5.25% has encouraged many mortgage lenders to trim their own rates, injecting competition into the market. The Fed will reveal its decision on 1 November, with the Bank following a day later.

Marcus Brookes at Quilter Investors said: “Following the most aggressive series of rate hikes in its history, the ECB has joined the Federal Reserve and Bank of England in hitting the pause button and assessing exactly what impact its actions are having to date. Eurozone inflation has come down significantly and is expected to moderate further, although it is still some way off target.

“There remain several risks that may keep inflation stubbornly high including increasing wage growth and the uncertainty in the Middle East, which is pushing up energy prices. Going forward, like other central banks, the ECB will say the market needs to expect higher interest rates for longer, with the door being left open should we see inflation spike again.”

Gurpreet Gill at Goldman Sachs Asset Management, said: “We believe the ECB’s hiking cycle is complete and expect today’s decision to keep rates on hold to extend into 2024. Rising energy prices present a fresh upside risk to headline inflation, but subdued growth and cooling core inflation will likely preclude further rate hikes.

“Our expectation is for a rate cut from the third quarter next year, though a sharp slowdown in the economy or a larger-than-expected deterioration in the labour market could prompt an earlier shift towards policy easing.”

18 October: All Eyes Now On Bank Of England Rate Decision

The annual rate of inflation remained unchanged at 6.7% in September this year according to official figures, keeping up the pressure on the Bank of England to stay firm in its fight to bring down inflation, writes Andrew Michael.

Today’s Consumer Prices Index (CPI) from the Office for National Statistics (ONS) came in slightly higher than market expectations and follows yesterday’s figures that showed UK wage growth had eased slightly to 7.8% in the three months to August.

The ONS said ‘core’ CPI, which strips out volatile data relating to energy and food, dipped to 6.1% in the year to September, from a figure of 6.2% recorded in August. However, this was offset in the main figure by increases in petrol and diesel at the pumps.

CPI including owner occupiers’ housing costs (CPIH) rose by 6.3% in the year to September, the same figure as a month earlier.

Grant Fitzner, ONS chief economist, said: “After last month’s fall, annual inflation was unchanged in September. Food and non-alcoholic drinks prices eased again across a range of items with the cost of household appliances and airfares also falling this month. These were offset by rising prices for motor fuels and the cost of hotel stays.

“The annual rate of core inflation has slowed again this month, driven by a slowdown in the cost of many goods, though services prices did rise a little this month.”

The Bank of England, which is set the task of holding long-term inflation at 2% by the government, will weigh up the latest wage growth and inflation data before it decides what to do next with the Bank Rate, which affects borrowers and savers alike.

The Bank’s next interest rate-setting announcement is due on 2 November.

Last month, in a knife-edge decision, the Bank left borrowing costs untouched for the first time in nearly two years, leaving them at a 15-year high of 5.25%. In recent weeks, central banks worldwide have warned that borrowing costs could remain at elevated levels until well into next year to keep up the pressure on inflation.

Rising geo-political tensions in the Middle East threaten to send the oil price soaring, adding to the potential for increased inflationary pressures worldwide.

Today’s CPI announcement also completes the final part of the government’s so-called pensions ‘triple lock’ equation, the adjustment applied to next April’s state pension rise that is conditional on one of three economic factors.

The triple lock’s aim is to protect the state pension from inflation, ensuring it rises by a real amount each year. The measure applied is the highest figure between inflation as measured by September’s CPI measure; wage growth as measured between May and July; and a minimum uplift of 2.5%

Subject to any final alterations, the wage growth figure announced last month will deliver an 8.5% increase to the state pension from next year.

Marcus Brookes, chief investment officer at Quilter Investors, said: “UK inflation’s march back down to target can very much be described as ‘slow and steady’, with CPI refusing to budge in September at 6.7%. Clearly the UK is not winning any races with this trajectory as inflation still remains incredibly elevated, and much more so than its peers. 

“With geopolitical tensions rising, energy and petrol prices are once again on the way up and inflationary pressures risk hitting an economy that has gone through a painful cost of living crisis. For now, the higher for longer interest rate narrative will continue to persist.”

Patrick Thomson, head of research and policy at Phoenix Insights, said: “12.6 million people are currently in receipt of the state pension, so any last-minute tweaks to the triple lock will have a material impact on the day-to-day lives of millions of people, not least those for whom the state pension is their only source of income.

“More than a third of adults over 66 who are still in work expect the state pension to be their main source of income in retirement.”

17 October: Data Plays Into Next Bank Rate Decision

Annual UK wage growth eased slightly in the three months to August this year but remained close to record highs, according to Office for National Statistics data published today, writes Andrew Michael.

The ONS said annual growth in regular pay, excluding bonuses, rose by 7.8% between June and August 2023. The figure was down marginally from the 7.9% registered for the three months to July this year, but remains one of the highest rates since comparable records began in 2001.

Annual growth in employees’ average total pay, including bonuses, stood at 8.1% between June and August, down from 8.5% a month earlier. The ONS said this figure was affected by one-off payments made to civil servants and NHS staff over the summer.

The latest wage figures offer little evidence that pressures in the labour market are easing, posing a challenge for Bank of England interest rate setters when they next meet on 2 November.

Today’s news could also have a bearing on the triple lock, the adjustment applied to the size of next year’s state pension that is conditional on one of three economic factors.

Last month, the Bank left borrowing costs untouched for the first time in nearly two years following better-than-expected figures that showed inflationary heat had started to come out of the UK economy.

Although inflation has fallen steadily since peaking at 11.1% in October last year, the current figure of 6.7% remains well above the Bank’s long-term target of 2%, set by the government.

Currently, the inflation figure – due to be revised tomorrow (Wednesday) – is lower than today’s wage growth figures, creating a challenge for those in charge of setting the Bank Rate, which currently stands at 5.25%. 

Alice Haine, personal finance analyst at Bestinvest, said: “High wage growth can ease the financial squeeze for households, [but] it runs the risk of fuelling inflation if businesses pass on that cost to customers by hiking the price of their goods and services. This would only add further pressure to household finances at a time when energy prices are under threat from geo-political tensions and rising demand amid the colder weather.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Wage growth is slowing quickly enough for the Bank of England’s interest rate-setting Monetary Policy Committee to keep Bank Rate at 5.25% next month.”

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “This wage data could affect how the government is thinking about the triple lock. Average wage growth including bonuses hit 8.1%, falling back from last month’s 8.5% rise. This 8.5% figure is the one that should be used for the state pension triple lock calculation and, as inflation is on the wane, it should give pensioners their second blockbusting increase in a row.

“However, given that these figures have been swollen by the impact of one-off payments given to civil servants and NHS workers over the summer, we may see the government look to take a slightly different course. Average wage rises excluding bonuses remain at 7.8% and, if the government adopted this figure, it could make a saving on its state pension bill while also delivering what should be an inflation-beating increase for pensioners.”

12 October: Next Rates Decision Remains Difficult To Call

Headline US inflation stood at 3.7% in the year to September 2023, unchanged from a month earlier, writes Andrew Michael.

The US Bureau of Labor Statistics reported today that the Consumer Price Index (CPI) for All Urban Consumers rose month-on-month by 0.4% on a seasonally adjusted basis in September, having risen by 0.6% in August. The Bureau blamed housing for over half of the September increase, adding that an increase in fuel was also a “major contributor” to a rise in the ‘all items’ inflation figure.

As expected, the core CPI figure, which strips out volatile food and energy prices, rose by 0.3% in September, taking the 12-month figure to 4.1%, down from 4.3% in August.

The Federal Reserve, the US equivalent of the Bank of England, left borrowing costs unchanged last month in a range between 5.25% and 5.5%, following an 18-month period that had been dominated by consecutive bouts of monetary tightening to rein in stubbornly high inflation.

As with other central banks worldwide, the Fed is required to maintain long-term inflation at a level of 2%.

The rate-setting Federal Open Markets Committee (FOMC) reveals its next decision on 1 November.

Today’s figures come hot on the heels of last week’s news of a surge in jobs creation, with the US economy filling 336,000 vacancies during September compared with an expected figure of 170,000 jobs.

Seema Shah, chief global strategist at Principal Asset Management, said: “After the shock and awe of last week’s jobs report, today’s CPI print is reassuringly uneventful. With core CPI in line with expectations and extending the disinflation narrative, there is nothing in the inflation report that should sway the Fed in one direction or the other.

“Indeed, while inflation is slowly edging lower, the strong labour market means that the threat of inflation resurgence cannot be ignored, keeping the Fed on its toes. The question around whether or not there will be one more interest rate hike is yet to be answered.”

Daniel Casali, chief investment strategist at Evelyn Partners, said: “The ongoing slowdown in core inflation could go some way to counteracting the jobs report last week if the FOMC is to keep interest rates on hold when it next meets on 1 November.

“Moreover, policymakers are likely to place importance on the recent sharp rise in long-term government yields, which reduces the need for the Fed to tighten further, as the markets have effectively done their job for them. The FOMC will also be aware of the impact on growth from strikes in the auto sector and a potential US government shutdown from mid-November.”

Neil Birrell, chief investment officer at Premier Miton Investors, said: “The last US inflation report before the Fed’s meeting later this month shouldn’t give them too much of a headache. The core rate for September came in as expected and this will allow the Fed to proceed carefully from here. 

“Overall, the economy remains robust in the face of tighter policy, supported by the jobs market. Those looking for a soft [economic] landing will not be disappointed by this number, but they will not want to see it moving any higher.”

Marcus Brookes, chief investment officer at Quilter Investors, said that, despite the refusal of headline inflation to budge following the latest official figures, “the US remains in a much better place in the battle against inflation compared to other developed economies, and it is from this position of strength that its economy has been able to resist any recessionary prediction to date.

“However, just as markets were concerned when inflation spiked last year, they will be equally concerned about the future path of inflation and what happens next. As inflation has come down, it has become incredibly stubborn once again and is not likely to reach its target for some time.

“This leaves the Federal Reserve in a tricky place once again. It wants inflation to come back to target, but as it is likely to persist above that level for some time, what can it do? One option it has been mooting is to act now and carry out another interest rate rise this year, but risk overcorrecting. Or it can wait and continue with its ‘higher for longer’ message that has spooked markets in recent weeks, but risk moving too slowly?”

21 September: No Certainty Cycle Peak Has Been Reached

The Bank of England has left borrowing costs untouched for the first time in nearly two years following yesterday’s better-than-expected figures that showed inflationary heat is continuing to come out of the UK economy, writes Andrew Michael.

Today’s knife-edge decision by the Bank’s Monetary Policy Committee (MPC), which voted 5-4 in favour of the move, leaves the Bank Rate at a 15-year high of 5.25%. This follows a run of 14 consecutive rises stretching back to December 2021 and could mark the peak of borrowing costs in the current cycle.

The decision comes a day after official figures showed that UK inflation dipped to 6.7% in the year to August 2023, down from 6.8% a month earlier (see story below).

Although inflation has fallen steadily since peaking at 11.1% in October last year, the 6.7% figure remains well above the long-term 2% target set for the Bank of England by the government.

The MPC said: “The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation.

“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

The next Bank Rate decision is 2 November 2023.

Rob Morgan, chief investment analyst at Charles Stanley, said: “Of concern to the Bank has been the rapid growth in wages, in excess of 8% year on year, meaning consumers are more likely to be able to keep up with rising prices, potentially fuelling inflation further.

“Added to a resurgent oil price, which means energy can’t be relied upon to be a falling component of inflation any longer, the Bank still has a job on its hands to get inflation back to target.”

Today’s news will come as a relief to more than a million borrowers with variable rate and tracker mortgages who have been battered by a series of rising home loan costs stretching back to December 2021.

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “The Bank of England’s Monetary Policy Committee has delivered some relief to hard-pressed households by maintaining the base rate of interest at 5.25%.   

“Undoubtedly, the overriding factor behind the Bank’s decision has been the fall in the UK’s inflation rate in August, particularly the sharp drop in underlying price pressures which indicate that earlier rate increases are beginning to work.”

Hussain Mehdi at HSBC Asset Management said: “This was a very tough call for the MPC which is reflected in the 5-4 vote split. The surprise dip in August inflation and clear signs that the UK economy is creaking under the pressure of higher rates are likely to have triggered a more ‘dovish’ inclination among policymakers.

“We believe there is now a good chance that the Bank Rate has peaked – a view we share for both the US Federal Reserve and European Central Bank policy rates. Although the latest UK pay growth numbers are a cause for concern, labour market data is lagging. Forward-looking indicators suggest the UK economy is already flirting with recession, a backdrop consistent with cooling wage growth and a policy pivot.”

20 September: Reserve Remains ‘Attentive’ To Inflation Risks

The Federal Reserve, the US equivalent of the Bank of England has, as expected, left borrowing costs untouched following an 18-month period that has been dominated by repeated bouts of monetary tightening to curb stubbornly high inflation, Andrew Michael writes.

Today’s announcement means that the Fed’s target benchmark interest rates continue in a range between 5.25% and 5.5%. The Bank of England announces its latest Bank Rate decision tomorrow (Thursday). The current UK rate is 5.25%.

With a soft landing looking increasingly likely for the US economy, the Federal Open Market Committee (FOMC) voted unanimously today to maintain rates at their present 22-year high.

Alastair Borthwick, Bank of America’s chief financial officer, said earlier that it was “difficult” to see a US recession while elevated consumer spending boosts the country’s economy.

The FOMC said: “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.

“The US banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

The decision to hold echoed the Fed’s actions in June this year when it also maintained borrowing costs at prevailing rates. This contrasted with a month later when a quarter point hike propelled rates to their present level.

In line with other central banks, such as the Bank of England and the European Central Bank (ECB), the Fed is mandated by government to maintain inflation at a long-term average of 2%. Between March 2022 and May 2023, the Fed raised the cost of borrowing on 10 consecutive occasions.

Official figures show that US inflation stood at 3.7% in the year to August, the second consecutive month of rising prices in the country following a downward trend that had lasted a year.

Despite the recent upwards move in inflation levels over the summer, caused by a surge in energy costs following Russia and Saudi Arabia’s decision to cut supplies and prop up oil prices, analysts’ expectations that the Fed would maintain borrowing costs at their present level proved correct.

The possibility remains, however, that the Fed will hike rates for a final time in the current cycle later this year, even though “one more boost is unlikely to trouble the market,” according to Richard Flynn, UK managing director at Charles Schwab UK.

Fiona Cincotta, senior financial markets analyst at City Index, said: “With inflation still above the Federal Reserve’s 2% target, recent data highlighting resilience in the US economy, and oil prices aiming for $100 a barrel, the Fed will want to keep the door open for another potential hike in November or December.”

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “With today’s pause, we are now in the waiting game with the Fed to see if their action to date is enough to achieve the coveted ‘soft landing’ in the US. Each and every data point released from now on will be scrutinised and pored over with a fine tooth comb to get any indication about whether the Fed will raise rates again, or when in fact it is time to start cutting rates.

“Ultimately, given the continued strength of the economy and the labour market, we will likely be waiting quite a while before rates are cut. However, having originally been late to raising rates in the face of spiralling inflation, Fed chair, Jerome Powell, won’t want to make the same mistake on the way back down and inadvertently overcorrect by doing nothing.”

20 September: Inflation Down To 6.7% Ahead of Bank Rate News

The annual rate of inflation was 6.7% in August this year, down from 6.8% a month earlier, confounding expectations of a first uptick in rising prices since February, writes Andrew Michael.

Today’s Consumer Prices Index (CPI) from the Office for National Statistics leaves tomorrow’s Bank Rate decision from the Bank of England in the balance.

A rise in the annual inflation figure in August would likely have triggered a fifteenth consecutive rise in the cost of borrowing. Market expectations had been for a quarter percentage point hike from 5.25% to 5.5%.

But today’s announcement, which also showed that ‘core’ CPI, which strips out volatile data relating to energy and food, dipped to 6.2%% in the 12 months to August (down from 6.9% in July), is another economic indicator that may lead the Bank to pause, for now at least, from hiking the cost of borrowing further.

CPI including owner occupiers’ housing costs (CPIH) rose by 6.3% in the year to August, down from 6.4% a month earlier.

Grant Fitzner, ONS chief economist, said: “The rate of inflation eased slightly this month driven by falls in the often-erratic cost of overnight accommodation and air fares, as well as food prices rising by less than the same time last year.

“This was partially offset by an increase in the price of petrol and diesel compared with a steep decline at this time last year, following record prices seen in July 2022.”

Mr Fitzner added: “Core inflation has slowed this month by more than the headline rate, driven by lower service prices.”

The Bank of England, which has a government-mandated long-term inflation target of 2%, will weigh up the latest inflation data before it decides what to do with the Bank Rate.

Although UK inflation has continued on a broadly downward trend since February, recent news from the ONS about accelerating wage growth suggests the spectre of inflation has not disappeared.

Yesterday, the Paris-based Organisation for Economic Co-operation and Development (OECD) forecast that the UK economy would have the highest inflation rate among the world’s richest nations this year. The OECD said it expected the UK inflation rate to average 7.2% during 2023.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Figures from the ONS reveal an unexpected downtick in inflation to 6.7% in the 12 months to August 2023, despite rising prices at the petrol pumps. It’s a considerably more positive outcome than the uptick many economists had predicted, largely driven by a significant fall in food prices, while core inflation also reduced from 6.9% to 6.2%. 

“While this dip in inflation eases the pressure somewhat on the Bank of England to raise rates once more, it still remains poised to pull the trigger on another 25 basis points interest rate hike tomorrow. If this proves to be the case, many will be asking when enough is enough. The BoE has had a tough task in navigating its fight against inflation, and this morning’s figures suggest it may finally be having a real impact.”

Neil Birrell, chief investment officer at Premier Miton Investors, said: “This morning’s better-than-expected inflation data may provide some relief for the Bank of England. While this may not be enough of a fall to prevent a further increase in rates, core inflation coming in much lower than expected is good news.

“Last month there was a bit of good news on UK inflation and more interest rate-sensitive UK financial assets had a sharp bounce, showing that there are buyers waiting for a catalyst. It will be interesting to see if the same reaction will follow this time.”

14 September: Mood Music Suggest Rates May Have Peaked

The European Central Bank (ECB) is hiking interest rates to an all-time high in a bid to slow down rising prices across the eurozone, writes Andrew Michael.

The ECB has announced that it is raising its main refinancing option by 25 basis points to 4.5%. The quarter percentage point uplift, expected by financial forecasters, will also apply to its deposit rate, which increases to 4%, and its marginal lending facility, which rises to 4.75%.

Explaining its decision, the tenth time in a row it has increased rates, the ECB warned that inflation was “expected to remain too high for too long”.

Along with other central banks, such as the Bank of England and the US Federal Reserve, the ECB is required to maintain inflation at 2% over the medium term.

The latest increases in borrowing costs, which will take effect from 20 September, followed forecasts that inflation across the trading bloc would come in at 5.6% on average in 2023.

Today’s move takes the ECB deposit rate above the record high reached in 2001 when rate-setters raised rates to boost the value of the newly launched euro.

But the ECB hinted that today’s rise could be the last in the current cycle, saying: “The governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

The Bank of England and the US Fed announce their latest interest rate decisions next week. In line with events in Europe, the markets are betting that borrowing costs in the UK will also see a quarter-point rate rise, but that the US could keep rates on hold until at least November.

Investment professionals said the next consideration is how long borrowing costs will remain at record levels.

Robert Scramm-Fuchs, portfolio manager at Janus Henderson Investors, said: “It was probably a close decision, but we did get that one final interest rate hike from the ECB that the stock market was mostly expecting. Judging from the language of the statement and downgraded mid-term inflation estimates, it sounds like the ECB is done now with the hiking cycle, and we should expect a long plateau.”

Anna Stupnytska, an economist at Fidelity International, said: “From now, the focus for markets will shift to how long rates will be kept at these restrictive levels, which will, of course, depend on the inflation and growth trajectory from here.

“With the monetary policy transmission channel clearly working forcefully, a euro area recession is looming. As a result, the ECB might have to execute a fast course correction in 2024. But for the time being their guidance is likely to focus on the ‘higher-for-longer’ scenario.”

13 September: US Inflation Rise Not Due To Trigger Rate Hike

Headline US inflation stood at 3.7% in the year to August, up from 3.2% recorded in July, marking a second consecutive month of rising prices following a downward trend that had lasted for a year, writes Andrew Michael.

An increase, announced today by the US Bureau of Labor Statistics, had been expected after energy costs soared following a decision by exporters, including Saudi Arabia and Russia, to cut supply in a bid to prop up oil prices.

Despite today’s increase, analysts doubt whether it will be enough to convince the US Federal Reserve to raise the cost of borrowing when the Federal Open Market Committee reveals its next interest rate decision on 20 September. 

Today’s data from the Bureau also showed that the Consumer Price Index for All Urban Consumers rose by 0.6 percentage points in August this year, compared with a 0.2pp increase of a month earlier. The Bureau said fuel was the largest contributor to the monthly all items increase, accounting for over half the increase.

Core inflation, which strips out volatile food and energy prices, was up by 0.3pp in August this year, following a 0.2pp increase in July. But over the 12 months to August, the Bureau said core inflation – which is monitored closely by central banks – rose by 4.3%, lower than the 4.7% recorded in the year to July.

The Fed’s benchmark interest rates currently stand between 5.25% and 5.5% – their highest since 2001. In July, Jay Powell, the Fed’s chair, said the central bank, the US equivalent of the UK’s Bank of England, would decide on further rate increases on a meeting-by-meeting basis.

Hugh Grieves, fund manager of the Premier Miton US Opportunities Fund, said: “On the surface, the headline inflation rate ticked higher for the second month in a row, but the Federal Reserve will be relieved to see core inflation continue to decline. 

“The worry for the Fed will be that higher energy costs start spreading into the wider economy, raising the risk of core inflation reigniting towards the end of the year and forcing central banks to begin raising rates once more.”

Seema Shah, chief global strategist at Principal Asset Management, said: “The rise in headline inflation should come as no surprise given the recent run of energy prices and the Fed will likely look through the number – for now. 

“It’s likely that the inflation print is not enough to tilt next week’s Fed call towards a rate hike. But neither has it entirely cleared up the question of a November pause compared with the likelihood of a hike.”

16 August: Rising Wages May Fuel Further Bank Of England Hike

The annual rate of inflation fell sharply to 6.8% in July from 7.9% in June, but this welcome news – the third consecutive monthly fall in the cost of living – is unlikely to deter the Bank of England from raising interest rates next month, writes Andrew Michael.

Today’s Consumer Prices Index (CPI) from the Office for National Statistics (ONS) was broadly in line with economists’ expectations, which had predicted inflation dropping as far as 6.7%.

The ONS also reported that core inflation, which strips out volatile food and energy prices, rose by 6.4% in the 12 months to July 2023, the same rate as a month earlier. On a monthly basis, CPI fell by 0.4% last month, compared with a 0.6% rise in July 2022.

CPI including owner occupiers’ housing costs (CPIH) rose by 6.4% in the year to July, down from 7.3% recorded in June this year.

Matthew Corder, ONS deputy director of prices, said: “Inflation slowed markedly for the second consecutive month, driven by falls in the price of gas and electricity as the reduction in the energy price cap came into effect.

“Although remaining high, food price inflation had also eased again, particularly for milk, bread, and cereal. Core inflation was unchanged in July, with the falling cost of goods offset by higher service prices.”

Inflation for food and non-alcoholic drinks in July fell to 14.9% from 17.4% in June, meaning that grocery prices are still hurtling upwards, albeit at a slower rate.

The Bank of England, which has a government-mandated long-term inflation target of 2%, will weigh up the latest inflation data carefully as it decides what to do next with the Bank Rate, the UK’s core cost-of-borrowing figure.

This stands at 5.25% having been hiked by quarter of a percentage point a fortnight ago. The next Bank Rate announcement is due on 21 September and an increase to 5.5% is expected in some quarters. The ONS inflation figure for August will be released the previous day.

Although inflation has started to fall significantly, yesterday’s news from the ONS that UK wage growth rose to a record 7.8% (8.2% including bonuses) in the three months to June this year will cause warning bells to ring at the Bank, as higher wage settlements may drive inflation higher.

On their current trajectories, it now seems likely that wage rises will outstrip inflation next month and become the determining factor in the size of the pensions triple lock uprating announced in November and which will come into force at the start of the new tax year on 6 April 2024.

Commenting on the fall in inflation in July, Jason Hollands, managing director at Bestinvest, said: “This is encouraging progress and will undoubtedly be touted by the government as evidence that their fiscal prudence is working in conjunction with the impact of higher interest rates set by the Bank of England. 

“However, inflation still has some way to go before it returns to the Bank’s long-term target rate of 2%, so the fight against inflation is not yet over.”

David Henry, investment manager at Quilter Cheviot, said: “With inflation falling to 6.8% and yesterday’s data showing wages increased by nearly 8% over the past year, the cost-of-living crisis may finally be beginning to wane. Households are still under immense pressures, however, and inflation isn’t going to fall dramatically, but it will be pleasing to millions to see their take-home pay now seeming to keep up with inflation.

“However, the headline numbers only tell a fraction of the story. Food prices continue to hit consumers, while core inflation is refusing to budge substantially. With the surprise in earnings growth added in and the economy holding up in the face of adversity, the Bank of England will probably determine that more interest rate rises are required to get the job done.”

10 August: Housing Costs Main Reason For Uptick On June Figure

US inflation rose by 3.2% in the year to July, up from 3% recorded in June, ending a run of 12 consecutive monthly declines in consumer prices, writes Andrew Michael.

Today’s announcement from the US Bureau of Labor Statistics also showed that the separate Consumer Price Index for All Urban Consumers rose by 0.2 percentage points in July, the same increase as a month earlier. The Bureau reported that housing “was by far the largest contributor to the monthly all items increase”.

Core inflation, which strips out volatile food and energy prices, was up by 0.2% in July, the same figure as June. Over the 12 months to July, the Bureau said core inflation had risen by 4.7%, a slower pace than in the year to June.

Despite the first acceleration in consumer prices for a year, the market continues to bet that the Federal Reserve, the US central bank, will keep the cost of borrowing at its present level when its rate-setting committee reveals its next decision in September.

The Fed’s target benchmark interest rates currently stand between 5.25% and 5.5% – their highest level since 2001. Last month, Fed chair, Jay Powell, said the central bank would decide on further rate increases on a meeting-by-meeting basis.

Neil Birrell, chief investment officer at Premier Miton Investors, said: “US inflation came in broadly as expected in July, although the year-on-year figure is a little lower than anticipated. The August number will be out before the Fed next meets in mid-September, but there is nothing in this release to suggest that they will do anything other than keep interest rates exactly where they are.

“It is increasingly looking like the Fed has done a good job, for now, anyway. While we could see inflation track upwards again, markets will be giving them the thumbs up in the short term.”

David Henry, investment manager at Quilter Cheviot, said: “Core inflation continues to be more stubborn, and it will be important that this begins to fall more into the autumn, when seasonal factors should subside.

“Those expecting cuts at some point this year or early next year may be disappointed. The Fed has stated rates will stay sufficiently high [to control inflation] for the immediate future and it will be desperate not to have a repeat of the 1970s, where we saw inflation spike again as central banks were too early in easing off on monetary tightening.”

3 August: Inflation Not Expected To Hit 2% Target Until Q2 2025

As widely expected, the Bank of England has announced an increase to the Bank Rate of 0.25 percentage points, taking it to a 15-year high of 5.25%.

This is the 14th rise in succession since the Bank Rate started its upwards trajectory in December 2021, when it stood at just 0.1%, its lowest level ever.

An estimated 1.4 million borrowers with variable rate and tracker mortgages will see their costs increase from the next payment. According to trade body UK finance, variable rate borrowers with an average mortgage balance of £220,000 will face a monthly rise of £15, while those with trackers will pay £24 more.

Borrowers with a fixed rate mortgage will feel the impact when their current deal comes to an end, with many facing huge increases in monthly payments. The average rate for a two-year fix is now between 6.5% and 7%, according to Moneyfacts, which is up to 5 percentage points more than their previous rate.

There are an estimated 800,000 fixed-rate deals ending in the second half of 2023 with a further 1.6 million deals due to end in 2024. There are around seven million fixed rate deals in total.

The Bank of England is increasing the Bank Rate in its continuing battle with inflation. The latest official figure puts the annual rate at 7.9% in June, but the Bank’s target is 2%.

There were some concerns that the Bank might implement an 0.5 percentage point increase to 5.5%, but the fact that inflation dropped sharply to its current level from 8.7% in May seems to have softened its approach.

The Bank expects inflation to fall to 5% by the end of the year, reaching its 2% target by the second quarter of 2025. It acknowledges the pain associated with Bank Rate increases but says the hikes are necessary to defend the overall health of the economy.

The next Bank Rate announcement is on 21 September, with further adjustments due in November and December. The next rate move will be largely determined by the inflation figure for July, which will be revealed by the Office for National Statistics on 16 August.

Laura Suter at investment platform AJ Bell commented: “Slowing inflation means that interest rates aren’t expected to rise by as much as they previously were – a few months ago we were expecting rates to peak at 6.5% but expectations now are 6% or even 5.75%. 

“This has had the knock-on benefit that banks have reduced rates for mortgage customers. We’ve now seen a raft of big banks trim their rates – not sufficiently to make a dramatic difference to people’s monthly repayments, but homeowners will be breathing a sigh of relief that mortgage rates are headed in the right direction.

“Savers are the losers here, as it means an end to the successive savings rate hikes we’ve seen over the past 18 months. It means that anyone who has been playing the waiting game before locking into a fixed rate deal might be wise to move swiftly before rates drop further.”

27 July: Experts Suggest Rate Rise Cycle May Be Ending

The European Central Bank (ECB) is raising interest rates by a quarter of a percentage point, increasing its deposit rate to 3.75%, while hiking its main refinancing option to 4.25%, writes Andrew Michael.

Today’s decision takes effect from 2 August, pushing the cost of borrowing within the eurozone to the record high last reached in 2001 when the ECB attempted to boost the value of the newly-launched euro.

The move comes as the ECB tries to quell persistently high inflation. Although the eurozone inflation figure fell to 5.5% in the 12 months to June this year – down from 6.1% in May – it remains well in excess of the ECB’s 2% medium-term target.

The interest rate rise – the ninth consecutive hike since last summer – followed a similar move by the US Federal Reserve yesterday (see story below).

The ECB said: “Developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period.

“While some measures show signs of easing, underlying inflation remains high overall. The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.”

Clémence Dachicourt, senior portfolio manager at Morningstar Investment Management, said: “The ECB’s latest 0.25% increase comes as no surprise. However, recent surveys suggest the economic slowdown is now affecting both manufacturing and services within the eurozone.

“This points towards the ECB nearing the end of its rate-hiking cycle, but the persistence of core inflation also tells us rate cuts are not on the agenda for now.”

26 July: Modest Increase Suggests Inflation Is On Ropes

The Federal Reserve, the US equivalent of the Bank of England, is raising its target benchmark interest rates by a quarter percentage point to a range between 5.25% and 5.5% – their highest level since 2001, Andrew Michael writes.

Having left borrowing costs untouched at its June rate-setting meeting, the Federal Open Market Committee (FOMC) voted unanimously for the 25-basis point rate rise today, signaling a return to monetary tightening, which is designed to tackle high levels of inflation.

Inflation in the US stands at 3% in the year to June, comparing favourably with the 7.9% annual rate seen in the UK this month.

Investors will now be looking for clues from the Fed as to whether this is the last hike in the current rate-setting cycle – and, should that be the case, when US policymakers will start lowering the cost of borrowing.

Following the sharper-than-expected fall in the US inflation figure a fortnight ago – from 4% to 3% – the Fed said today that: “Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low.”

But the Fed also acknowledged that “inflation remains elevated”.

Along with other central banks worldwide, including the Bank of England and European Central Bank (ECB), the Fed has a medium to long-term mandate of maintaining inflation at 2%.

All eyes will turn next  to the ECB’s rate-setting decision tomorrow (Thursday), before the Bank of England follows suit next week on 3 August.

At its last meeting, the Bank caught commentators on the hop with a larger-than-expected half-percentage point rate rise which took the Bank Rate to 5%.

Gurpreet Gill, global fixed income expert at Goldman Sachs, said: “Paradoxically, today’s Fed meeting was one of the most certain and uncertain of the cycle. An 0.25%pp rate hike was fully priced-in and widely expected by forecasters and investors. 

“However, investors remain divided on whether this marks the last increase in the current tightening campaign.

“We think recent data is consistent with the US policy rate peaking in July, as core consumer prices index inflation slowed sharply in June.“

19 July: Forecasters Surprised As Inflation Dips Below 8%

Inflation fell sharply to 7.9% from 8.7% in the year to June this year, ahead of market expectations and offering hope that the Bank of England’s extended period of monetary tightening is finally starting to rein in soaring prices, Andrew Michael writes.

Today’s Consumer Prices Index (CPI) figure from the Office for National Statistics (ONS) is the lowest recorded rate since the 7% registered in March 2022. By the following month, the figure had jumped to 9% in the wake of the Russian invasion of Ukraine.

The ONS also reported that core inflation, which strips out volatile food and energy prices, rose by 6.9% in the 12 months to June, down from 7.1% in May. On a monthly basis, CPI rose by 0.1% in June, compared with a rise of 0.8% for the same month last year.

CPI including owner occupiers’ housing costs (CPIH) rose by 7.3% in the year to June, down from 7.9% in May.

Grant Fitzner, ONS chief economist, said: “Inflation slowed substantially to its lowest annual rate since March 2022, driven by price drops for motor fuels. Meanwhile, core inflation also fell back after hitting a 30-year high in May. Food price inflation eased slightly this month, although it remains at very high levels.”

Mr Fitzner added: “Although costs facing manufacturers remain elevated, especially for construction materials and food items, the pace of growth has fallen across the last year with the overall cost of raw materials falling for the first time since late 2020.”

The Bank of England – with a medium to long-term inflation mandate of 2% – will scrutinise the latest ONS data as it weighs up what to do next with the Bank Rate, which is the UK’s core cost-of-borrowing figure. This currently stands at 5% having been hiked by half a percentage point in June. The next announcement is due on 3 August.

Until the release of today’s inflation figures, market watchers had been expecting another half-point hike by the Bank next month. But with rising prices easing by a greater amount than expected, a rethink may be called for.

Marcus Brookes, chief investment officer at Quilter Investors, said: “Today’s inflation figures give us the glimmer of light as it finally surprises by beating expectations and falling more than predicted. 

“However, while it is a nice surprise to beat expectations, it still leaves us wondering once again why the UK is such a drastic outlier compared to other developed economies when it comes to inflation. (We are) still far above where the Bank of England wants it to be before it can even consider a pause in the rate hikes we have become accustomed to.

“Frustratingly, while also beating expectations, core inflation is remaining persistently stubborn and refusing to budge significantly. It may be that finally the well-known lags in the effect of interest rate rises are beginning to have an effect, but it still remains very sticky so way too early to begin celebrating.”

Neil Birrell, chief investment officer at Premier Miton Investors, said: “Some good news on UK inflation at last, coming in below expectations for June and most importantly the core inflation rate fell more than thought.

“Although we should expect it to track down further and it may be at its lowest level for a year, it is still high in absolute terms and the Bank of England needs to be vigilant and act accordingly until there can be a level of certainty that inflation is back under control.”

Eurozone sees inflation fall to 5.5%

Eurozone inflation fell to 5.5% in the 12 months to June this year, down from 6.1% a month earlier, according to the latest official figures from Eurostat.

The eurozone is made up of the 20 countries that use the euro as their currency. Eight members of the 28-strong European Union do not use the euro.

The rising cost of food, alcohol and tobacco each contributed to the figure across the 20-nation eurozone single trading bloc, which came in lower than the 6.4% recorded in the year to June across the EU.

The average inflation figure for the EU as a whole stood in marked contrast to the rates recorded at individual country level.

Annual price inflation to June in Luxembourg stood at 1%, with both Belgium and Spain registering a figure of 1.6%. But over the same period, prices rose by 19.9%, 11.3% and 11.2% in Hungary, Slovakia, and Czechia respectively.

Along with other central banks worldwide, including the Bank of England and the US Federal Reserve, the European Central Bank has a remit to maintain Eurozone inflation over the medium to long-term at 2%.

The ECB’s next interest rate-setting announcement takes place on 27 July.

13 July: Global Equities Buoyed By Surprise 3% Inflation Figure

The pound has continued its recent upwards run and stock markets worldwide have also edged higher after a sharper than expected fall in US inflation (see story below) prompted a dollar sell-off, Andrew Michael writes.

Sterling climbed 0.5% in trading against the dollar earlier today – taking the value of the pound to a 15-month high of $1.305 – as investors increased their bets on the US Federal Reserve cutting borrowing rates early next year.

European stocks also moved higher following overnight gains in Asia and as US stocks climbed to their highest levels in more than a year. The Europe-wide Stoxx 600 index rose by 0.3% earlier today, having climbed 1.5% in Wednesday’s trading session, its highest one-day rise in nearly two months.

On Wall Street a few hours earlier, US stocks rallied so that, by the close of trading, the US S&P 500 stock index had risen to its highest level in 15 months, with big tech companies leading the way.

This followed a release of the country’s latest official inflation figures which showed that prices rose by 3% in the year to June 2023, their slowest recorded rate of growth since March 2021.

After a series of aggressive base rate hikes imposed by the Fed, this means that annual US consumer price inflation is homing in on the central bank’s medium to long-term target of 2%. The Fed’s UK equivalent, the Bank of England, also has a similar inflation-setting mandate. But despite carrying out 13 successive interest rate hikes since December 2021, the UK inflation figure remains resolutely stubborn at a figure of 8.7%.

The Fed’s next interest rate decision is due on 26 July, with the Bank of England revealing its latest announcement a week later.

12 July: Bank Of England Still Likely To Hike Rate In August

US inflation stood at 3% in the year to June, down from 4% in the 12 months to May. Falling energy costs – down 16.7% for the period – helped deliver the decrease.

Core inflation – with energy and food costs stripped out on the basis of their short-term volatility – edged up month-on-month to 4.8%, but this was the smallest monthly increase since June 2021.

The overall picture will be seen as positive by economists – and viewed with envy in the UK, where inflation is running hot at 8.7% – because it may ease pressure on the US Federal Reserve to increase interest rates.

Interest rate increases, which raise the cost of borrowing and sap demand from an economy, are seen as one of the few tools available to central banks in their battle against stubbornly high inflation readings.

That said, the Fed, in common with the Bank of England and other central banks, has a long-term inflation target of 2%, meaning further increases in its ‘target’ rates cannot be ruled out.

In June, it chose to hold these at 5% – 5.25%, but there is speculation that it might increase them when it next meets on July 25-26.

The Bank of England raised interest rates from 4.5% to 5% in June. The persistently high rate of UK inflation is expected to prompt a further increase, perhaps to 5.25%, when the Bank announces its latest decision on 3 August.

Many UK mortgage lenders have already increased the cost of borrowing in anticipation of a higher Bank of England rate. Earlier today, the Bank said borrowers are facing increases amounting to hundreds of pounds a month in their mortgage costs over the coming years.

22 June: Half-Point Rise Likely To Trigger Further Loan Hikes

The Bank of England has hiked its Bank Rate today by 0.5 percentage points from 4.5% to 5%, its highest level in 15 years, writes Andrew Michael.

This is the 13^th increase in a row since December 2021, with the larger-than-expected rise in interest rates intended to rid the UK economy of stubbornly high inflation. But today’s announcement will have an instant impact on the finances of more than a million UK homeowners whose mortgage costs will be affected by the decision.

Mortgage customers on variable rate and tracker deals will suffer from an instant hike on their repayments as lenders pass on the revised cost of borrowing.

In addition, it is thought that over 500,000 mortgage holders will come to the end of fixed-rate deals during the remainder of 2023. Given the mortgage market’s current volatile state, it’s inevitable many of these will be facing increased payments when they negotiate a new home loan.

In contrast, savers should – in theory – benefit from the latest interest rate rise, although providers tend to be slower at upping savings rates if they decide to do so at all.

Explaining its decision, the Bank’s 9-strong Monetary Policy Committee, which voted 7 to 2 in favour of the rise, said it was responding to “material news” in recent economic data that showed worsening inflationary pressures in the UK economy.

Yesterday, research from the StepChange debt charity showed that nearly seven million mortgage customers had found it difficult keeping up with bills and credit commitments in the past few months.

Earlier this week, the Institute for Fiscal Studies warned that 1.4 million mortgage holders, half of them aged under 40, could lose more than 20% of their disposable income as interest rates continue to rise.

Today’s move from the Bank of England comes in response to a prolonged period of soaring inflation caused by a toxic cocktail of global events – from the fallout of the Covid 19 pandemic and subsequent supply chain bottlenecks, to the war in Ukraine that contributed to sustained high energy prices and soaring food costs.

Official figures showed yesterday that UK inflation remained stuck at 8.7% in the year to May, the same figure that had been recorded a month earlier.

Although the Bank’s continued policy of monetary tightening has eased the spectre of rising prices – the annual figure reached a 40-year high of 11.1% last autumn – the downward trajectory has been comparatively slight compared to other major economies, many of which share the same medium-term 2% inflation target.

With annual inflation running at 4% in the year to May, the US Federal Reserve decided to leave interest rates on hold when it revealed its latest announcement last week. The Fed’s target funds rate continues to stand in a range between 5% and 5.25%,

A day later, the European Central Bank raised interest rates by a quarter of a percentage point across the Eurozone trading bloc where inflation stood at 6.1% in the year to May.

Janet Mui, head of market analysis at RBC Brewin Dolphin, said: “The Bank of England is doubling down on its fight against rising prices after red-hot inflation and wage data recently.

“It has faced increased scrutiny and pressure on its ability to bring down inflation as well as doubts around its forecasting credentials. Today’s hike is a desperate move to show markets it is highly committed to its mandate despite the financial pain inflicted.”

Fiona Cincotta, senior financial markets analyst at City Index, said: “This was the first jumbo rate hike from the Bank of England since February and came despite the market only pricing in a 40% probability of such a large move.

“After yesterday’s inflation shock, with core inflation showing that it still hasn’t peaked [core inflation rose from 6.8% to 7.1% in May], the central bank felt it needed to act aggressively to show that it is serious about fighting inflation. I think there was a fear among policymakers that if they didn’t go big, the price/wage spiral could strengthen.”

The next Bank Rate announcement is due on 3 August 2023.

21 June: Decline In Food Inflation Only Crumb Of Comfort

Inflation remains stuck at 8.7% for the second consecutive month in the year to May 2023. The surprise figure – many commentators had been expecting a fall – will deal a blow to the hopes of millions of mortgage holders and other borrowers, who are now expecting interest rates to rise further, writes Andrew Michael.

The Bank of England is widely expected to continue with its extended policy of monetary tightening when it reveals its latest Bank rate decision tomorrow, with a rise from 4.5% to 4.75% or even 5% on the cards.

Mortgage lenders have already been raising rates in recent days in anticipation of a Bank Rate hike.

Today’s figure from the Office for National Statistics (ONS) came in higher than expected by the market and leaves question marks about whether the Bank’s 18-month policy of continued monetary tightening is having sufficient effect in bringing rising prices under control.

On a monthly basis, the UK inflation rate, as measured by the Consumer Price Index (CPI), rose by 0.7% in May, identical to the figure recorded for the same month a year ago.

The ONS also reported that CPI including owner occupiers’ housing costs (CPIH) rose by 7.9% in the year to May this year, up from 7.8% recorded a month earlier. 

Core CPI, excluding volatile contributors such as energy, food, and alcohol, rose by 7.1% in the 12 months to May, up from 6.8% in April.

According to the ONS, rising prices for air travel, recreational goods and second-hand cars were the main contributors to both the latest CPI and CPIH inflation figures.

Grant Fitzner, ONS chief economist, said: “After last month’s fall, annual inflation was little changed and remains at a historically high level.

“The cost of airfares rose by more than it did a year ago and is at a higher level than usual for May. Rising prices for second-hand cars, live music events and computer games also contributed to inflation remaining high.”

Today’s inflation figure remains well above the Bank of England’s medium-term target of 2% and is markedly higher than that of other major economies. The latest inflation figure from the US showed that prices were rising by 4% on an annual basis, while the equivalent figure for the Eurozone trading bloc covering most of Continental Europe stands at 6.1%.

In an important week for the UK economy, the Bank of England’s interest rate-setting Monetary Policy Committee will scrutinise today’s ONS inflation data as it weighs up what to do next with the Bank Rate which currently stands at 4.5%, having been hiked a dozen times consecutively since December 2021.

The market was already tilting strongly towards another 25 basis point hike which would apply extra pressure to mortgage customers on variable rate home loans who have already experienced a series of rising costs.

Marcus Brookes, chief investment officer at Quilter Investors: “Today’s inflation figure will be a bitter pill to swallow for consumers, investors and the government. With CPI unchanged and core inflation rising, this confirms that the Bank of England has no choice but to raise interest rates tomorrow.”

“The UK really does seem to be suffering from a more unique set of circumstances and this is leaving the Bank of England with little choice, despite consensus that this inflation is driven more by supply issues than demand ones.”

Alice Haine, personal finance analyst at Bestinvest, said: “Stubbornly high inflation means consumers won’t see any improvement in their personal finances as prices are still very much on the rise.”

“The fear is that more rate rises could push some households to breaking point when their fixed-rate mortgages mature, and they must absorb significantly higher repayments. With mortgage costs increasingly taking up a larger share of consumers’ take-home pay, this could have dire consequences for the economy as people restrict their spending to ensure they can meet their household bills.”

15 June: All Eyes On Bank Of England After US Fed And ECB Moves

The European Central Bank (ECB), as expected, has announced it is raising interest rates by a quarter of a percentage point, increasing its deposit rate to 3.5%, while hiking its main refinancing option to 4%, writes Andrew Michael.

The move takes eurozone trading bloc interest rates to their highest level in 22 years as the ECB battles persistently high inflation.

Today’s announcement, the eighth consecutive rate rise since last summer, is at odds with yesterday’s decision by the Federal Reserve to leave borrowing costs unchanged in the US for the first time since the beginning of 2022 (see story below).

Explaining its decision to raise rates, effective from 21 June, the ECB’s Governing Council warned that inflation, while coming down, is projected to remain too high for too long, adding that it is “determined to ensure that inflation returns to its 2% medium-term target in a timely manner”.

The ECB said that today’s rate increase “reflects the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission.

“Past rate increases are being transmitted forcefully… and are gradually having an impact across the economy.”

Estimates from Eurostat, suggest that eurozone inflation stood at 6.1% in May. The official figure for the month is released tomorrow (Friday).

This compares with an official inflation print of 4% in the US for the year to May, announced earlier this week. UK inflation stands at 8.7% – more than double that of the US – but is expected to fall when official figures are released next Wednesday.

A day later, the Bank of England will reveal its latest interest rate decision, with markets predicting a 25-basis point hike. If accurate, this would take the UK Bank Rate to 4.75%, its highest level for 15 years.

Joseph Little, global chief strategist at HSBC Asset Management, said: “Today’s hike delivers the fastest tightening of monetary policy in Europe since the Bundesbank in the 1980s, with 400 basis points worth of interest rate hikes over the last 12 months.

“To put it in context, the normal interest rate for Europe in the medium term is below 2%. By any yardstick, this is now a very significant and rapid tightening of European financial conditions.”

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The European Central Bank would dream of being in the position of the Federal Reserve in being able to pause the rate hikes to assess their impact. However, that is not the case, and we have another rate rise on the Continent.

“With the Bank of England facing an equally difficult time with inflation and the effect of interest rates, we are beginning to see a divergence in monetary policy in developed markets.”

Laith Khalaf, head of investment analysis at AJ Bell, says next week’s Bank of England decision will be a tricky one: “The Bank is caught between a rock and a hard place, as it has to choose between pushing more mortgage borrowers towards the brink and letting inflation run riot.

“The latest readings for core inflation and wage growth have come in hot, and that has spooked the market, sending gilt yields skywards [see story below] and raising expectations of more interest rate hikes to come.

“The market is now firmly pricing in an interest rate rise at the Bank’s June meeting, and then four further hikes, taking us to 5.75%. Some more ugly inflation data could easily tip those expectations up to 6%.”

14 June: Hike Could Land In July To Tackle Rising Core Prices

The Federal Reserve, the US equivalent of the Bank of England, has left its target benchmark interest rate untouched today after rapidly increasing the cost of borrowing since early 2022 in its fight against inflation, writes Andrew Michael.

This means the Fed’s target funds rate continues to stand in a range between 5% and 5.25%, its highest level since 2007.

While the Fed’s decision to hold rather than increase rates was widely expected, what’s less clear is whether today’s decision marks an end, or simply a pause, to the country’s tightening of monetary policy.

The move was prompted at least in part by yesterday’s latest official US headline inflation figures, which showed a steep month-on-month fall from 4.9% to 4% (see story below). However, this means consumer prices are still rising on an annual basis at twice the Fed’s long-term target of 2% – albeit much lower than the 9.1% recorded last summer.

With core inflation (where volatile food and energy prices are stripped out of the calculation) ticking up by 0.4% in the month to May, and taking into account recent strong employment figures, there could be more interest rate hikes to come, with one seen as likely in July.

The Federal Reserve stated: “In assessing the appropriate stance of monetary policy, the Federal Open Market Committee will continue to monitor the implications of incoming information for the economic outlook.

“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals [of maintaining inflation at 2%]. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

The Bank of England will announce its latest decision on the UK Bank Rate on 22 June. It is expected to increase from 4.5% to 4.75% or even 5% because inflation in the UK remains relatively high. 

The most recent figure for May from the Office for National Statistics for the headline rate is 8.7%, down from 10.1% in April, although core inflation increased from 6.2% to 6.8%.

The ONS will update the inflation numbers next Wednesday, ahead of the Bank Rate decision. Earlier today, the Chancellor of the Exchequer, Jeremy Hunt, admitted that the UK has “no alternative” but to keep hiking interest rates to tackle rising prices.

Tomorrow, the European Central Bank (ECB) announces its latest interest rate decision, which will affect borrowing costs across the eurozone single trading bloc.

The Fed, the ECB and the Bank are each mandated to maintain long-term inflation in their respective jurisdictions at 2%.

David Henry, investment manager at Quilter Cheviot, said: “For the first time in well over a year, the Federal Reserve has held interest rates at their current level. While not usually a significant event, this one feels especially so. After all the hikes in the last 15 months and the various supply chain shocks, the tide is finally turning in the battle against inflation.”

“But victory is not being declared yet. The Fed has made it clear all along that it is responding to the data and core inflation remains well above target. This pause is very much the Fed in wait and see mode – it will still be looking for its action to date to take effect in the economy, and thus won’t want to slam the brakes on too hard.”

13 June: Steep Fall May Not Prevent Rate Hike In July

US inflation cooled by slightly more than expected to 4% in the year to May, down from 4.9% recorded a month earlier, Andrew Michael writes.

Today’s announcement from the US Bureau of Labor Statistics increases the likelihood that the Federal Reserve will leave borrowing costs as they are when revealing their interest rate decision tomorrow. 

Last month, the Fed raised interest rates for the tenth consecutive time since March 2022. They currently stand in a range between 5% and 5.25%.

But with the Consumer Price Index (CPI) for All Urban Consumers rising by 0.1% in May – or 0.4% when the price of items such as energy and food is stripped out – pressure is likely to remain on the Fed to revisit the case for monetary tightening later this year, potentially in July.

The Bureau said housing was the largest contributor to inflation month-on-month, along with price rises for second-hand cars and trucks.

Unlike the UK, where inflation remains stubbornly high at 8.7%, the rate of price increases in the US has slowed markedly from the 40-year high of 9.1% reached last summer. Annual US inflation is now at its lowest rate in more than two years.

The European Central Bank (ECB) will announce its latest monetary policy decision, which affects borrowing costs across the eurozone trading bloc, later this week. These are currently in a range of 3.25% to 3.75%. The market consensus expects a rise in borrowing costs of 25 basis points.

The same thinking applies to the Bank of England, which is expected to raise the UK’s Bank Rate (currently 4.5%) for the 13^th consecutive time since December 2021 when it meets on 22 June.

The Fed, the Bank and the ECB are each mandated to maintain long-term inflation in their respective jurisdictions at 2%.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The Fed will be pleased to see inflation come in lower than expected for May, giving it a bit of breathing room to pause rates in the foreseeable future.”

Seema Shah, chief global strategist at Principal Asset Management, said: “With inflation coming broadly in line with expectations, the pressure is off. Tomorrow is likely to be the first FOMC meeting since March 2022 without a policy rate hike. Yet, with annual core inflation actually rising further in May and coming hot off the heels from the very strong jobs report, the July FOMC meeting is very much live.”

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said: “The further sharp drop in US headline inflation to 4.0% builds further trust that inflation is under control and that further Fed tightening may not be necessary. 

“With continuing strong employment numbers, we believe investors do not need to fear an imminent deep recession, and rather look forward to a normalising economic environment with a shallow and short recession – should there be one.”

24 May: Inflation In Single Figures For First Time Since August

Inflation fell steeply from 10.1% to 8.7% in the year to April 2023, the first time the figure has been below 10% since August last year, writes Andrew Michael.

Today’s figure from the Office for National Statistics (ONS) is the first clear-cut sign that an extended series of interest rate hikes dating back to December 2021 has started to bring rising prices under a degree of control. But it remains well above the Bank of England target of 2% and is considerably higher than the 4.9% recently recorded in the US and 7% across the Eurozone trading bloc.

On a monthly basis, the rate as measured by the Consumer Price Index (CPI) rose by 1.2% in April 2023, compared with 2.5% recorded in the same month last year.

Grant Fitzner, ONS chief economist, said: “The rate of inflation fell notably as the large energy price rises seen last year were not repeated this April, but was offset partially by increases in the cost of second-hand cars and cigarettes.

“However, prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.”

The ONS also reported that the CPI including owner occupiers’ housing costs (CPIH) rose by 7.8% in the year to April this year, down from 8.9% a month earlier.

The Bank of England will scrutinise the latest ONS data as it weighs up what to do next with the Bank Rate which currently stands at 4.5% having been hiked by a quarter of a point a fortnight ago, its 12^th consecutive increase in 18 months.

The next Bank Rate announcement is due on 22 June.

Speaking yesterday to the House of Commons Treasury Select Committee, the Bank’s governor, Andrew Bailey, admitted there are “very big lessons to learn” in setting monetary policy after the UK’s central bank failed to forecast the recent rise and persistence of inflation.

Responding to today’s inflation news the Chancellor of the Exchequer, Jeremy Hunt, said: “The International Monetary Fund (IMF) said yesterday we’ve acted decisively to tackle inflation, but although it is positive that it is now in single digits, food prices are still rising too fast.”

“So as well as helping families with around £3,000 of cost of living support this year and last, we must stick resolutely to the plan to get inflation down.”

Yesterday, the IMF backtracked on its previous estimation that the UK would be the worst performing economy in the G7 list of leading world economies.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “While this fall in inflation shows things are beginning to move in the right direction, we cannot ignore the fact that there is an incredibly long way to go. “Inflation at 8.7% is still eye-wateringly high with prices rising steeply, and we are unlikely to see such significant eases as this in the coming months. Instead, we can expect to see a more gradual decline.”

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “Let’s not forget that a large part of April’s drop is simply down to accounting measures. April 2022 saw energy prices increase by 47.5%. Thanks to the government’s energy price guarantee, this energy surge has now dropped out of the year-on-year equation, leading the comparative inflation rate to naturally fall.”

11 May: Twelfth Increase In Row Since 2021 Heaps Pain On Borrowers

The Bank of England has increased borrowing costs today for the twelfth consecutive time, writes Jo Thornhill. 

In a move widely predicted by markets, the Bank’s Monetary Policy Committee (MPC) voted to raise its Bank Rate from 4.25% to 4.5% – this is its highest level since 2008. 

The Committee, who voted seven to two in favour of today’s rise, has been pushing up rates in an attempt to bring down inflation, which has remained stubbornly high and in double digits for the past seven months. 

The members who voted against the rise wanted to hold the rate at 4.25%.

For the 1.4 million homeowners on variable rate mortgages, today’s announcement will have an impact on their household budget. 

A borrower with a £150,000 repayment mortgage paying a tracker rate – where the interest rate paid is directly linked to the Bank Rate – will see their annual cost rise by £252, for example. 

If the same borrower had been on a variable rate since December 2021, when interest rates first started to climb, they would have seen their monthly repayments rise by almost £370 – this equates to more than £4,300 a year in extra mortgage costs.

Households on fixed rate mortgages will not see an immediate change to their monthly repayments. But most will now be facing much higher borrowing costs when their current fixed rate ends and they need to find a new mortgage deal.

In contrast savers should benefit from an uplift in rates on deposit accounts. But an increase in the Bank of England Bank Rate is no guarantee of better savings rates. 

What does the Bank Rate rise mean for mortgage borrowers?
What does the Bank Rate rise mean for savers and investors?

Last month the Financial Conduct Authority said many savers had experienced ‘financial harm’ over the past year as interest rates have risen but banks have failed to pass on the benefits to customers in higher savings rates.

The cross-party Treasury Select Committee has this week written to a number of providers, including Nationwide building society, Santander, TSB and Virgin Money, to question their high profits versus low savings rates and the overall fairness to customers.

Laura Suter, head of personal finance at AJ Bell, said: “Banks respond to two forces: the Bank Rate and competitors. They will use Bank Rate as a gauge of whether to raise their savings rates, but of much more importance is what their competitors are doing. 

“Banks are keen to protect their profits, which comes at a cost to UK households. While mortgage rates have shot up, savings rates haven’t risen by nearly as much and some banks are worse than others for pocketing the difference.”

Marylen Edwards, head of buy-to-let lending at property lender MT Finance, said: “Considering recent events in the global financial markets, this latest rate rise was not unexpected. 

“While a reduction in Bank Rate would have been welcome news, it feels as though another increase is necessary to combat stubbornly high inflation and help bring back some much-needed stability. Hopefully this will be the last rise before we start to see a plateau.”

Adrian Anderson at property finance specialists Anderson Harris said: “The never-ending story of interest rate rises continues, resulting in yet another blow to borrowers. The cost-of-living crisis coupled with the prospect of higher mortgage payments has prompted an increase in clients looking to move to interest-only mortgages in an attempt to soften the blow.  

“What next? Who knows, and that is part of the problem. Uncertainty could stall the housing market. High interest rates, and in turn, high mortgage rates, seem to be hanging around for longer than many expected.”

Mike Stimpson at wealth manager Saltus said: “Interest rate increases driving mortgage rates have already been affecting the population. Our latest Wealth Index report revealed 73% of the 2000 people surveyed envisaged monthly mortgage repayments rising to a level that would place strain on their cashflow.”

The next Bank Rate announcement is on 22 June.

10 May: US Inflation Below 5% For First Time Since 2021

US inflation eased to 4.9% in the year to April, down from 5% recorded a month earlier, suggesting that the interest rate-hiking policy by the Federal Reserve is having the desired effect of damping down rising prices, writes Andrew Michael.

Month-on-month, however, the Consumer Price Index for All Urban Consumers rose by 0.4% in April compared with a 0.1% increase in March, according to figures from the US Bureau of Labor Statistics.

The Bureau said housing costs were the largest contributor to the monthly figure, followed by rising prices for used cars and trucks and also for fuel.

Core inflation, which removes volatile energy and food prices, dipped slightly to 5.5% year-on-year, in line with expectations.

Unlike the UK, where inflation remains stubbornly in double digits at 10.1%, the rate of price increases has slowed markedly in the US from its 40-year high of 9.1%, reached last summer. Annual US inflation now stands at its lowest rate in two years.

The Federal Reserve, the equivalent of the Bank of England, raised interest rates by 0.25 percentage points last week – a tenth consecutive hike since March last year – to stand in a range between 5% and 5.25%.

The decision was followed by a similar move by the European Central Bank, affecting the Eurozone trading bloc (see story below). The Bank of England is expected to also increase interest rates by a quarter of a percentage point when its rate-setting Monetary Policy Committee reveals its latest decision tomorrow (11 May).

Richard Carter at Quilter Cheviot said: “The Federal Reserve will be breathing a sigh of relief that last week’s hot labour statistics have been followed up with a slightly lower than anticipated inflation print today, albeit only fractionally lower than expectations.

“This should present the Fed with all it needs now to hit the pause button on the rate rises and reassess its position over the coming months. With inflation in the US now below 5% for the first time in two years, markets will be thinking the light at the end of the tunnel is getting brighter, and the worst of this inflation is far in the rear-view mirror.”

Daniel Casali at Evelyn Partners said: “Although there are pockets of price gains in the CPI report, in used cars for instance, the broad message is that overall inflation is slowing and that should give the Fed grounds to keep interest rates unchanged when it next meets on 14 June.”

4 May: Monthly Rate Of Increase Slows To 0.25pps

The European Central Bank (ECB) has raised interest rates by a quarter of a percentage point, moving its deposit rate up to 3.25%, with the rate on its main refinancing option rising to 3.75%, writes Andrew Michael.

Today’s announcement mirrors yesterday’s move by the US Federal Reserve (see story below). The Bank of England will announce the latest Bank Rate next Thursday, 11 May – it currently stands at 4.25%, and a rise of 0.25% to 4.5% is expected.

The ECB decision means interest rates across the eurozone have risen seven consecutive times since the middle of last year, although today’s increase is half the 0.5% move announced in March.

Explaining its decision, the ECB said that, while headline inflation has declined over recent months, “underlying price pressures remain strong”.

According to Eurostat, eurozone inflation stood at 7% in April, up from the 6.9% in March but sigificantly less than the 8.5% recorded in February. The figure is higher than the 5% reported in the US but well below the 10.1% afflicting the UK.

3 May: US Central Bank Expected To Hold Fire After Latest Hike

The Federal Reserve, the US equivalent of the Bank of England, has raised its target benchmark interest rate by 0.25 percentage points in what is widely seen as the last rate-hiking action – for now – in its lengthy struggle to tame inflation, Andrew Michael writes.

Today’s decision by the Fed, its tenth rate rise in a row since March 2022, means that its target funds rate now stands in a range between 5% and 5.25%, the highest level since 2007.

The quarter point hike is the third consecutive rise of this magnitude in a row, following a run of five previous 50-basis point increases that began last summer.

Explaining today’s announcement, the central bank’s rate-setting Federal Open Market Committee (FOMC) reiterated that its aim was to achieve maximum employment while maintaining the inflation rate at 2% over the longer run.

The FOMC said economic activity expanded at a modest pace in the first quarter of this year and described job gains as “robust”, while the unemployment rate “remained low”.

It stated: “In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” 

The Fed’s latest decision has arguably been its trickiest to date and something of a balancing act. US inflation currently stands at 5% – less than half the 10.1% recorded by the UK in the year to March 2023.

But, despite an aggressive rate-setting policy by the US central bank, rising prices have not slowed down as rapidly as hoped.

The inflation figure also remains offset against a tight labour market, low unemployment, and a teetering banking system in light of the recent collapse of Silicon Valley Bank and this week’s sale of the troubled First Republic Bank to JP Morgan.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “This move may be the last rate hike of the current cycle but it still makes this the most aggressive rate hiking campaign since the 1980s.

“The decision will have been carefully weighed as, on the one hand, recent economic data suggests that inflation remains elevated, particularly in the services sector, which needed to be slowed. But to the fore will have been the fact that the US banking system has experienced significant turbulence in recent months, with four banks collapsing since early March.”

Whitney Watson, global co-head and co-cio of fixed income and liquidity solutions, at Goldman Sachs Asset Management, said: “Recent data reflect a moderating but resilient picture of the US economy, so today’s rate hike was widely anticipated. Inflation is trending in the right direction, but progress has been bumpy. A pause in rate actions is therefore appropriate, but further tightening is plausible should inflation prove sticky.”

19 April: Modest Rate Fall Confounds Economist Predictions

UK inflation, as measured by the Consumer Price Index (CPI), eased from 10.4% to 10.1% in the year to March 2023, continuing to defy expectations by remaining in double digits, writes Andrew Michael.

Today’s figure, published by the Office for National Statistics (ONS), came in higher than the 9.8% predicted by a poll of economists.

Month-on-month to March this year, prices rose by 0.8%, compared with a figure of 1.1% recorded both in February 2023 and also for the month of March last year.

The ONS said the largest downward contributions to today’s figure came from motor fuel, housing and household services, particularly liquid fuels. But these were partially offset by rises in the cost of food – up by a whopping 19.2% – recreation and culture.

Grant Fitzner, ONS chief economist, said: “Inflation eased slightly in March, but remains at a high level. The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year.

“Clothing, furniture and household goods prices increased, but more slowly than a year ago. However, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high.”

The ONS reported that the CPI including owner occupiers’ housing costs (CPIH) rose by 8.9% in the year to March 2023, down from 9.2% recorded a month earlier.

The Bank of England will be looking carefully at the latest ONS data as it weighs up what to do next with the Bank Rate which currently stands at 4.25%. Its next decision will be announced on 11 May.

Despite turbulence in the global banking sector, the UK’s central bank raised interest rates last month for the eleventh time in a row in an attempt to rid the economy of persistent double-digit inflation.

Despite a recent blip, which saw UK inflation rise in February, the overall trajectory has been downward since it reached 11.1% in October last year. But the figure remains stubbornly elevated.

Responding to today’s news, Jeremy Hunt, the Chancellor of the Exchequer, said: “These figures reaffirm exactly why we must continue with our efforts to drive down inflation so we can ease pressure on families and businesses.

“We are on track to do this, with the Office for Budget Responsibility forecasting we will halve inflation this year.”

Ed Monk from Fidelity International said: “The strain on households shows little sign of easing with yet another reading of headline inflation above 10%. 

“This isn’t how it was supposed to go. Price rises were expected to be much less painful by this point of the year as the steep rises of early 2022 fell out of annual comparisons, but this reading puts inflation back to its level from January.

“It’s now clear the UK has an inflation problem that is worse and more persistent than in Europe and the US. Price rises here are proving more difficult to neutralise and the Bank of England will almost certainly add at least one more quarter-point hike to borrowing costs.”

Tom Hopkins, portfolio manager at BRI Wealth Management, said: “The small month on month decline can be credited to a fall in energy prices year on year and some easing in the food shortages that we saw in February. However, these falls appear to be offset by the strong labour market as wage growth has not slowed as much as economists expected.

“Today’s figure shows that the cost-of-living crisis many Britons find themselves in might not be releasing its grip on families as quickly as first expected. The UK economy is not out of the woods just yet.”

Alice Haine, personal finance analyst at Bestinvest, said: “Softening inflation will come as a relief for households, offering hope that the financial squeeze is well and truly on the retreat, though a headline reading of 10.1% won’t deliver much relief to wallets just yet as prices are still rising at rates that would have seemed extraordinary at the start of last year.”

12 April: Steeper-Than-Forecast Decline Sharpens Focus On Fed

US inflation fell to 5% in the year to March 2023, down from 6% a month earlier, suggesting the policy of aggressive interest rate hikes by the country’s central bank has started to bring prices under control, writes Andrew Michael.

Despite falling further than expected, the ‘all items’ consumer price index figure announced today by the US Bureau of Labor Statistics is high enough to pose a question for the US Federal Reserve about whether or not to pause hikes when it makes its next interest rate decision in May.

The Bureau noted that housing was “by far the largest contributor” to rising prices, more than offsetting a fall in the price of energy over the past month.

The Bureau added that the monthly rate of inflation for March increased by 0.1%, four times less than the 0.4% recorded in February.

Today’s inflation figure means US consumer prices as a whole have continued to fall for the past nine months.

In contrast, the UK’s most recent annual inflation figure – announced in March – experienced a surprise rise, to 10.4% year on year from 10.1% a month earlier, after recording three consecutive monthly falls.

Markets have recently taken the view that the Fed needs to ensure stability in the financial system following last month’s global banking crisis, which resulted in the collapse of Silicon Valley Bank and the takeover of Credit Suisse by UBS, a rival Swiss bank.

Along with other central banks such as the Bank of England and European Central Bank, the Fed is mandated to maintain inflation at 2% over the long-term.

Marcus Brookes, chief investment officer at Quilter Investors, said: “US inflation appears to be easing more than expected for the time being, suggesting that the Federal Reserve’s actions to combat inflation are having a positive impact without pushing the economy into recession.

“Inflation will continue to be a primary factor in the Fed’s decision-making process, but recent events, such as the failure of Silicon Valley Bank and other lenders, have started to impact market sentiment and hint at potential underlying strains in the US economy. 

“Nonetheless, the Fed will be relieved to see no major unpleasant surprises in this inflation report, which should help stabilise the situation further.”

Daniel Casali, chief investment strategist at Evelyn Partners, said: “The risk for the Fed now is that it overtightens policy and this leads to a financial crunch in the banking sector.

“The Fed will be aware that there are inflation drivers that are outside its control, particularly energy prices. OPEC’s recent production cut has given a boost to crude oil prices and complicates the job of the Fed to bring down inflation.

“Despite the hawkish rhetoric from some of its rate-setting committee members, the Fed may be reluctant to raise rates too far.”

23 March: Bank of England Responds To Shock Prices Uptick

The Bank of England today hiked borrowing costs for the eleventh time in a row in an attempt to rid the UK economy of stubborn double-digit inflation and despite recent turbulence affecting the global banking sector, writes Andrew Michael.

The Bank’s Monetary Policy Committee (MPC) raised the influential Bank Rate by 0.25 percentage points to 4.25%, its highest level in 15 years.

What does the Bank Rate rise mean for mortgage borrowers?

What does the Bank Rate rise mean for savers and investors?

Accounting for its decision, which was in line with economists’ forecasts, the MPC – which voted 7 to 2 in favour of the move – maintained its position that any further rate hikes would depend on the emerging evidence of inflation.

Today’s announcement will have an immediate impact on the finances of around 1.4 million homeowners whose mortgage costs will be affected by the decision.

According to the banking trade body UK Finance, around 640,000 home loan borrowers on tracker products, which rise and fall in line with central rates, will see their payments rise by an average £285 a year.

In addition, a further three-quarters of a million customers, with so-called standard variable rate mortgages, will face £182 a year in extra costs.

Households with fixed-rate home loans will not experience a monthly change in their monthly payments immediately but could be faced with more expensive mortgages when they reach the end of current deals.

In contrast, today’s rate increase could generate mixed feelings among the UK’s savers seeking better returns.

A hike in the base rate is generally good news for customers with cash in savings accounts. But the announcement neither guarantees that providers will boost any or all of their returns straightaway, nor necessarily apply universally across all products.

Official data released yesterday showed that UK consumer prices rose by 10.4% over the year to February 2023, an unexpected upwards rebound in the inflation print after three months of falling prices.

Last night, the US Federal Reserve – the BoE’s central bank equivalent – raised its target funds rate by a quarter of a point to a range of 4.75% to 5%.

In doing so, the Fed prioritised the tackling of inflation over fears that a hike in rates would exacerbate a febrile period in the global banking sector that, in recent days, has seen the collapse of several regional US banks, plus UBS’s takeover of its Swiss rival, Credit Suisse.

The BoE said today that its Financial Policy Committee had briefed the MPC about recent global banking developments, adding: “The FPC judges that the UK banking system maintains robust capital and strong liquidity positions, and is well placed to continue supporting the economy in a wide range of economic scenarios.”

Both the US Fed – where inflation currently stands at 6% – and the BoE are required to maintain inflation at 2% over the long-term.

Nathaniel Casey, investment strategist at Evelyn Partners, said: “The split in voting is indicative of the tricky state of affairs confronting the MPC and other central banks, with committee members having to weigh the fragility of the global banking sector against the need to bring inflation back to target.

“The recent turmoil in the banking sector, which began with collapse of Silicon Valley Bank (SVB) nearly a fortnight ago, has reminded central banks that things can break when monetary policy is rapidly tightened. Although contagion risks from the tech bank crisis and Credit Suisse look to have receded for the time being, the BoE will need to tread carefully if it decides to further tighten monetary policy from here.”

The next Bank Rate announcement is due on 11 May.

23 March: Inflation Shock Adds To Bank Rate Pressure

The United States Federal Reserve last night raised its target federal funds rate to 4.75% to 5% – a quarter point increase.

The news is likely to influence the Bank of England’s thinking as it prepares to reveal its latest Bank rate decision at midday today.

The Bank rate, which largely determines interest rates across the economy and affects millions of mortgage borrowers and savers, is currently 4%. In the run-up to today’s Bank of England announcement, many commentators suggested it might remain unchanged after 10 consecutive increases since the end of 2021, from a historic low of 0.1%.

However, the news from the US, combined with yesterday’s shock increase in annual UK inflation, from 10.1% to 10.4%, makes a rise of at least 0.25 percentage points to 4.25% almost certain.

Variable rate and tracker mortgages would respond to an increase straight away, with fixed rate deals likely to become more expensive for those taking out a new loan or remortgaging.

Savings rates might also reflect an increase, although account providers have been criticised for responding sluggishly to previous increases, and in some cases for not passing on any increase whatsoever.

Justifying its decision to impose a quarter-point increase, the Federal Reserve said: “Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.

“The US banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. 

“The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”

Analysts have concluded that, if inflation remains above target for a prolonged period, the Federal Reserve will not shy away from raising interest rates further.

Both the Federal Reserve and the Bank of England follow mandates to keep their national inflation figure at 2%, with interest rate rises being their primary mechanism for achieving this. US inflation is running at 6%.

In the UK, the Office for Budget Responsibility last week forecast that inflation will fall to 2.9% over the course of 2023. If the figure remains stubbornly high over coming months, however, it is possible that the Bank rate will remain close to its current level.

22 March: Surprise Increase Raises Fears Over Bank Rate

Inflation – as measured by the Consumer Price Index (CPI) – rose from 10.1% to 10.4% year-on-year in February, according to figures out today from the Office for National Statistics (ONS), writes Kevin Pratt.

The increase – which confounded analysts who had expected inflation to fall to 9.9% after three months of decline from the November 2022 high of 11.1% – is attributed to rising prices in the restaurant, cafe, food and clothing sectors. 

ONS says this was partially offset by downward price movements from recreational and cultural goods and services (particularly recording media), and motor fuels.

Prices were up 1.1% on a monthly basis, compared with a rise of 0.8%, month on month, in February 2022.

Looking at the Consumer Prices Index that includes owner occupiers’ housing costs (CPIH), prices rose by 9.2% in the 12 months to February 2023, up from 8.8% in January.

The largest upward contributions to the annual CPIH inflation rate came from housing and household services (principally from electricity, gas, and other fuels), and food and non-alcoholic beverages.

Higher energy costs are a lingering consequence of Russia’s invasion of Ukraine in February last year.

On a monthly basis, CPIH climbed by 1.0% in February 2023, compared with a rise of 0.7% in February 2022.

The Bank of England will examine the ONS data closely as it decides what to do with the Bank rate, which currently stands at 4%. Its new rate – which will hugely influence interest rates across the economy – will be announced tomorrow at midday.

Analysts had been expecting the Bank rate to rise by a modest 0.25 basis points to 4.25% on the back of positive news about inflation, with some suggesting it might even be held at its current level. A steeper rise to 4.5% is now a possibility.

Danni Hewson at investment platform A J Bell commented: “Some of the reasons for the inflationary spike are unseasonable and mostly unpredictable.

“Normally bars and restaurants wouldn’t have been fighting in January to dish up alluring offers designed to grab a bit of the consumer cash that hadn’t been spent over Christmas. Normally new year clothing sales would have given way to full priced spring lines before the twinkly lights were stowed away. But these aren’t normal times and retailers and hospitality venues used February to retrench.

“There has been some good news, the price at the pump has fallen again and the cost of transport is also down. And while energy prices are still uncomfortably high compared with last year, at least households don’t have to deal with the prospect of an increase at the end of the month, which should prevent an inflation spike in April.

“And reading across, producer prices are still falling primarily thanks to a fall in the price of oil. Wholesale gas prices and the cost of other commodities are also down, but there is a lag and that’s keeping things uncomfortable for both businesses and households trying to balance the weekly budget.”

The US Federal Reserve announces its latest interest rate decision later today. Its current target rate is 4.5% to 4.75% – a rise towards 5% looks to be on the cards, even though US inflation is relatively low at 6%.

20 March: Central Banks Boost International Credit Flow

The Bank of England has responded to the takeover of crisis-hit bank Credit Suisse by its rival UBS, facilitated by the Swiss government, with a statement intended to reassure UK bank customers and financial markets.

Once the £2.5 billion deal was announced on Sunday, the Bank of England said: “We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability. 

“We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation. 

“The UK banking system is well capitalised and funded, and remains safe and sound.”

Deposits held in UK banks are protected by the government-backed Financial Services Compensation Scheme.

The Bank of England has also announced coordinated action with the central banks of the United States, Canada, Japan, Switzerland and the eurozone to increase ‘liquidity’ in international markets by giving commercial banks improved access to US dollars.

This will involve running dollar ‘swap lines’ between the banks on a daily rather than weekly basis. The arrangements, brought in to calm markets after a period of turmoil in the banking sector in recent weeks, will run at least until the end of April.

The Bank of England said: “The network of swap lines among these central banks is a set of available standing facilities and serves as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.”

16 March: ECB ‘Ready To Respond’ To Banking Sector Turbulence 

The European Central Bank (ECB) has raised interest rates by half a percentage point in the fight to tame inflation, despite fears a hike of this size could exacerbate a financial crisis following a tumultuous week in the global banking sector, Andrew Michael writes.

The ECB said today that it would increase the interest rate on its main refinancing operations to 3.5% and its deposit rate to 3%, in line with guidance it issued at its last monetary policy decision last month.

Since then, however, the banking sector has been thrown into turmoil amid contagion fears relating to the collapse of the tech-orientated Silicon Valley Bank in the US.

In addition, Swiss National Bank, the Swiss central bank, today provided £45 billion in emergency funding to beleaguered global banking giant, Credit Suisse in a bid to stave off a global financial crisis.

Against this backdrop, commentators queried whether the ECB would continue with its policy of half-percentage point rate hikes, or choose instead to pause or raise borrowing costs by a smaller amount.

Explaining its decision, the ECB – which is mandated to maintain inflation over the long-term at 2% – said rising prices across the eurozone remains the bloc’s main threat, adding that “inflation is projected to remain too high for too long”.

The ECB said it was “monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area”.

Next week, interest rate decisions are due from the US Federal Reserve and the Bank of England.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The ECB has taken a look at what is going on in the banking sector and has effectively said it is comfortable with what is happening by raising rates by half a percentage point.

“Credit Suisse appears to be teetering on the edge, and the ramifications its collapse could have on the European banking sector are profound. But the ECB continues to see inflation as the bigger risk to tackle. And this could perhaps be a good sign as it is hoped that the likes of Credit Suisse and Silicon Valley Bank are isolated incidents with their own set of circumstances.”

David Goebel, investment strategist at Evelyn Partners, said: “The ECB had been criticised for being behind the curve in the global fight against inflation, being the last of the three main central banks to begin its hiking cycle. However, these latest developments could turn this lagging position into an advantage.

“Rates in the eurozone are some way from being as restrictive as in the US, and given the lagged effect of increasing rates, this could leave Europe in a better position if the global economy were to soften from here.”

14 March: Banking Woes Complicate Next Week’s Decision

US inflation edged down to 6% in the year to February 2023, lower than the 6.4% measured a month earlier, Andrew Michael writes.

The figure remains high enough to complicate the Federal Reserve’s next decision on its benchmark target interest rate, due on 22 March, a day ahead of the Bank of England’s scheduled pronouncement on the UK Bank rate.

In addition to battling inflation, the Fed is wrestling with three bank failures in the past week and wider concerns about financial stability.

Consumer prices rose by 0.4% month-on-month to February this year, according to official figures from the US Bureau of Labor Statistics published today.

The Bureau said housing was the largest contributor to the monthly rise in prices, accounting for nearly three-quarters of the increase. Rising prices for food, recreation and household furnishings also added to the increase.

The latest reading means that US consumer prices as a whole have continued to fall for the past eight consecutive months. However, the Fed is mandated to maintain inflation at 2% over the long-term.

With the dial only moving down in small increments, commentators say US inflation has remained resolutely sticky, suggesting the Fed has more to do to bring prices under control.

Events in recent days concerning the failure of Silicon Valley Bank and the voluntary liquidation of crypto-focused lender Silvergate, have left US investors wondering which way the US central bank will proceed next.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “US inflation continues to fall and suggests the actions by the Federal Reserve are doing their job in bringing it down, while not tipping the economy into recession. However, core inflation continues to be troublesome and stickier than many would like, leaving further rate hikes on the table.

“Inflation will continue to be the key driver of decision making for the Fed, but events of recent days are beginning to weigh on market sentiment, and there are risks that under the bonnet, the US economy is under strain. The Fed will be delighted, however, that there are no gremlins in this inflation report and this should help to calm things following a very uncertain past week.

“With the Silicon Valley Bank fall-out still fresh, a 25-basis points rise in rates appears the most likely scenario for the Fed at its next meeting.”

Oliver Rust of data aggregator Truflation said: “January’s consumer prices data came in higher than expected at 6.4%, leading the Federal Reserve to indicate that it would hike by 50 basis points at its meeting on March 22, rather than the 25 basis points most expected.”

“However, considering the ongoing and delicate situation with US banks, it is now much more likely that the Fed will stick to a 25bps hike. Were the central bank to go ahead with a 50 basis point hike, this would likely come as a shock to already nervous markets.”

23 February: Wide Variations Reported Across Europe

Eurozone inflation fell to 8.6% in the year to January 2023, slightly above expectations, but down from 9.2% a month earlier, Andrew Michael writes.

Eurostat, the statistical office of the European Union (EU), said that the 20–nation eurozone’s inflation figure stood at 5.6% in January 2022.

Across the 28-nation EU as a whole, inflation stood at 10% this January, down from 10.4% in December, but nearly double the figure of 5.6% reported in January 2022.

Eurostat said the main contributors to the latest eurozone inflation figure came from rising food, alcohol and tobacco prices.

The data compiler added that the eurozone countries recording the highest annual inflation rates in January were the Baltic states of Latvia (21.4%), Estonia (18.6%) and Lithuania (18.5%).

In contrast, the lowest rates were recorded by Luxembourg (5.8%), Spain (5.9%), Cyprus and Malta (both 6.8%).

In a bid to tackle stubbornly high inflation levels running at four times the EU’s inflation target of 2%, the European Central Bank (ECB) raised its main borrowing costs by 0.5 percentage points across the single currency bloc from 8 February.

Coinciding with its latest inflation announcement, the ECB revealed its intention to raise borrowing costs by a further 50 basis points at the time of its next interest rate decision on 16 March.

Explaining its thinking, the ECB said: “Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.”

Nearly all the United States Federal Reserve’s policy makers supported a decision to further slow the pace of interest rate rises at the US central bank’s last policy meeting, but also highlighted that stemming unacceptably high levels of inflation would be the key factor in how much further rates needed to go up.

According to the minutes released last night from the Fed’s rate-setting meeting in January, policymakers agreed that rates would need to move higher, but that a move to smaller-sized hikes would allow them to accommodate incoming economic data more closely.

The Fed raised its target benchmark interest rate by 0.25 percentage points in February, to a range between 4.5% and 4.75%, having previously imposed five consecutive rate hikes of half a percentage point or higher since the summer of 2022.

15 February: ONS Attributes Fall To Lower Transport Costs

UK inflation eased to 10.1% in the year to January 2023, down from 10.5% recorded a month earlier, according to figures from the Office of National Statistics (ONS), writes Andrew Michael.

Despite remaining stubbornly in double digits for the fifth month running, today’s news of a fall in consumer price inflation – the third in three months – will boost hopes that the UK has finally reached a turning point following a year dominated by soaring prices.

The ONS said consumer prices fell by 0.1% month on month to January this year. The main contributor to the downward movement came from transport – particularly passenger transport and motor fuels – and from restaurants and hotels.

Rising prices of alcohol and tobacco partially offset the trend.

Grant Fitzner, chief economist at the ONS, said: “Although still at a high level, inflation eased again in January. This was driven by the price of air and coach travel dropping back after last month’s steep rise. Petrol prices continue to fall and there was a dip in restaurant, café and takeaway prices.

“There are further indications that costs facing businesses are rising more slowly, driven by falls in crude oil, electricity and petroleum prices. However, business prices remain high overall, particularly for steel products.”

Today’s figure follows on swiftly from yesterday’s US inflation figure which also reported a continuing downward trend (see story below).

Earlier this month, the Bank of England raised interest rates for the tenth time in just over a year (to 4%) as it continues its battle with double-digit inflation, which has exerted financial pressures on households and businesses alike.

Jeremy Hunt, Chancellor of the Exchequer, said: “While any fall in inflation is welcome, the fight is far from over.”

Rachel Winter, partner at Killik & Co, said: “The Bank of England’s difficult decision to continue the trend of hiking the base rate in the face of a cost-of-living crisis seems to have done the trick as the pace of price rises has slowed for the third consecutive month.

 “While today’s figures may offer some light at the end of the tunnel, prices remain at a 40-year high and many continue to face a cost-of-living crisis. People are faced with the tough balancing act of ensuring adequate cash holdings during a period in which we’ve narrowly avoided recession, while simultaneously investing wisely to prevent inflation eating away at any savings.”

Julia Turney, partner at Barnett Waddingham, said: “Inflation is slowing, but the cost-of-living battle continues. Following the 41-year-high of 11.1% seen in October, a third consecutive decline in inflation since November to 10.1% in January suggests we are beginning a slow but steady crawl towards the Bank of England’s 2% rate of inflation target. 

“However positive the news, we must remember that costs are still at an all-time high and it will be a long time before the pressure on households is lifted.”

14 February: Inflation Down For Seven Months In A Row

US inflation eased a fraction to 6.4% in the year to January 2023, higher than expected, but lower than the 6.5% recorded a month earlier, according to today’s official figures, writes Andrew Michael.

Forecasters had been mooting a deceleration in the annual rate of increase for consumer prices to 6.2%.

The All-Items Consumer Price Index, produced by the US Bureau of Labor Statistics, represents the smallest 12-month increase since October 2021.

Despite remaining at a multi-decade high, the latest reading means US consumer prices as a whole have continued to fall for the past seven consecutive months.

But with the dial barely moving for the latest update, commentators say US inflation remains resolutely sticky and that the Federal Reserve, the US central bank, has more to do to bring rising prices under control.

Last month, the Fed hiked its target benchmark interest rate by 0.25 percentage points in its ongoing bid to keep inflation at bay.

Hot on the heels of the Fed’s January announcement, the Bank of England and the European Central Bank each followed suit by raising their main borrowing rates by half a percentage point.

All three institutions are mandated to maintain inflation at 2% over the long-term.

The UK’s next inflation update is tomorrow (Wednesday) while official figures for the Eurozone will be released on 23 February.

Commenting on today’s figures, the Bureau said that housing was by far the largest contributor to the monthly all-items increase.

Gerrit Smit, manager of the Global Best Ideas Equity fund at Stonehage Fleming, said: “The headline inflation number of 6.4% is higher than general expectations, and a sign that the pathway to the Fed’s target 2% is going to take a while. As the Fed earlier indicated, they have more work to do, but we believe their new 25 basis point level of hikes stays on course.”

Marcus Brookes, chief investment officer at Quilter Investors, said: “While inflation in the US continues its gradual march back down from its recent highs, it cannot be claimed to be job done just yet for the Federal Reserve as the print comes in above expectations. This data shows that markets would be wise not to get ahead of themselves.”

2 February: Bank Rate Hits 4% – Highest In 15 Years

The Bank of England today raised interest rates for the 10th time in just over a year in its bid to rid the UK economy of sustained double-digit inflation, writes Andrew Michael.

The Bank’s Monetary Policy Committee (MPC) raised the Bank Rate by 0.5 percentage points to 4%, its highest level in 15 years. Official data released in January showed that consumer prices rose by 10.5% in the UK in 12 months to December 2022.  

Yesterday, the US Federal Reserve – the Bank of England’s equivalent – imposed a 0.25 percentage point rise on its Funds Rate, taking it to a range between 4.5% and 4.75% (see story below).

A key mandate for both the Bank of England and the Fed is to maintain inflation over the long term at 2%.

Today’s announcement by the Bank will force up borrowing costs almost immediately for around two million UK mortgage customers with variable rate or tracker mortgages.

Households with fixed-rate mortgages will not experience a change in their monthly payments immediately but could be faced with more expensive loans when they reach the end of current deals.

The nine-member MPC voted 7 to 2 in favour of today’s decision. Both dissenters favoured holding Bank Rate at 3.5%.

The Bank said that, while global consumer price inflation remains high, it is likely to have peaked across many advanced economies, including the UK. It added: “UK domestic inflationary pressures have been firmer than expected. Both private sector regular pay growth and services CPI [consumer prices index] inflation have been notably higher than forecast in the November Monetary Policy Report.

“Given the lags in monetary policy transmission, the increases in Bank rate since December 2021 are expected to have an increasing impact on the economy in the coming quarters.”

Jeremy Hunt MP, Chancellor of the Exchequer, said: “Inflation is a stealth tax that is the single biggest threat to living standards in a generation, so we support the Bank’s action today so we succeed in halving inflation this year.”

Brian Murphy, head of lending at Mortgage Advice Bureau, said: “The decision today was of course expected, but not welcomed, as the Bank of England has chosen to continue its war on inflation with more rate rises, pushing the base rate to a 15-year high. This will inevitably leave many homeowners feeling stuck and worried by the prospect of their mortgage costs getting even higher.”

Mike Stimpson at wealth advisor Saltus said: “Today’s rate rise – the third consecutive 0.5% hike – could have a significant effect on homeowners, many of whom are already struggling to cover their monthly payments.

“For a tracker mortgage, currently on 4.5%, a 0.5% rise will add an extra £41 to the monthly payment on a £150,000 mortgage arranged over 20 years. Our latest Wealth Index report reveals that 35% of mortgage holders are already struggling to cover the cost of the last two rate rises, while a further 43% admit any further increases will cause them to struggle.

“Of those who said a further rate increase would cause issues, one in seven (15%) said they would switch their mortgage to interest only to cope, one in five (22%) plan to reduce their pension contributions, whilst one in 30 say they would have consider selling their property to move somewhere cheaper.”

With savers in mind, Dan Howe at Janus Henderson Investors, said: “The latest rate increase will likely encourage mixed feelings among savers across the country seeking better returns. While an increase in the base rate generally is good news for those with cash in savings accounts, this doesn’t guarantee providers will boost their rates just yet. 

“Diversification is key for those who seek to protect their savings pot from inflation and look for real-term growth. A savings account with a good rate of return has its role, but so too does sensible investing.”

The European Central Bank (ECB) also announced today that it will raise its main borrowing cost by 0.5 percentage points, from 2.5% to 3%, with effect from 8 February, in a bid to reduce inflation across the Eurozone.

Against the backdrop of inflationary pressures across the single currency bloc, the ECB said it also intends to raise the cost of borrowing by another 50 basis points at its next monetary policy meeting in March.

The ECB said it would then evaluate its policy, adding: “Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.”

1 February: Funds Rate At 4.75% But Upward Momentum Easing

The United States Federal Reserve – the US equivalent of the Bank of England – has raised its target benchmark interest rate by 0.25 percentage points in its ongoing bid to tame inflation, Andrew Michael writes.

The Fed funds rate now stands in a range between 4.5% and 4.75%, a 15-year high, with the potential for more increases during 2023.

Today’s announcement invoked a smaller rate hike compared with five previous consecutive increases that began last summer, each of half a percentage point or more.

The Fed’s decision to reduce the size of its latest rate hike follows last month’s economic data showing US inflation easing to 6.5% in the year to December 2022, down from 7.1% recorded a month earlier. 

In the same way as the Bank of England, the Fed has a government-mandated mission to keep inflation at 2%.

Announcing its latest move, the Fed’s rate-setting Federal Open Market Committee, said it “anticipates that ongoing increases in the target range will be appropriate in order to attain a stance on monetary policy that is sufficiently restrictive to return inflation to 2% over time.”

It added: “ In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Countries around the world are continuing to fight inflationary pressures caused by a damaging cocktail of economic factors. These range from soaring energy prices – exacerbated by the war in Ukraine – to a series of supply chain bottlenecks resulting from the Covid-19 pandemic.

Tomorrow (Thursday), the Bank of England and European Central Bank are expected to adopt a similar stance to the Fed when each is expected to raise interest rates.

Despite a slight easing in recent months, UK inflation remains in double digits at 10.5%.

Commenting on today’s decision in the US, Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas fund, said: “Dampening inflation without damaging the economy too much has put the Fed’s skills to the test, but they are now getting close to being done.

“There may be more small hikes to come, but investors can start looking forward to a more stable capital market environment in this context.”

18 January: Inflation Running At More Than Five Times Target

UK inflation eased a fraction to stand at 10.5% in the year to December 2022, down from 10.7% recorded a month earlier, according to the latest figures from the Office of National Statistics (ONS) out today, Andrew Michael writes.

The fall – the second in two months – was in line with economists’ expectations.

A slight but continued decrease in the Consumer Prices Index (CPI) will raise hopes that a turning point has been reached following a year of soaring prices. There are hopes it will ease the pressure on the Bank of England before it reveals its next Bank rate decision on 2 February.

The Bank’s Monetary Policy Committee has raised the Bank rate, which largely determines interest rates elsewhere in the economy, including the housing market, a total of nine times since December 2021 to its current level of 3.5%. 

The ONS said that, on a monthly basis, its Index rose by 0.4% in December 2022, compared with a rise of 0.5% for the same month a year earlier.

It added that the largest downward contribution to the dip in inflation came from transport, particularly motor fuels, along with clothing and footwear. These were offset by rising prices in restaurants and hotels, along with food and non-alcoholic drinks.

Grant Fitzner, ONS chief economist, said: “Inflation eased slightly in December, although still at a very high level with overall prices rising strongly during the last year as a whole.

“Prices at the pump fell notably in December, with the cost of clothing also dropping back slightly. However, this was offset by increases for coach and air fares as well as overnight hotel accommodation. Food costs continue to spike, with prices also rising in shops, cafés and restaurants.”

Despite today’s announcement, inflation remains in double figures thanks to a combination of soaring energy prices exacerbated by the war in Ukraine and global supply chain bottlenecks in the wake of the pandemic.

Today’s announcement could have an expensive knock-on effect for mobile phone and broadband customers. Many service providers in this sphere use January’s inflation figure as the basis for their ‘in-contract’ price increases later this spring. Assuming they go ahead, prices for these arrangements could be hiked by as much as 14.5%.

Responding to today’s inflation figure, Jeremy Hunt, the Chancellor of the Exchequer, said: “High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down.

“While any fall in inflation is welcome, we have a plan to go further and halve inflation this year, reduce debt, and grow the economy – but it is vital that we take the difficult decisions needed and see the plan through.”

Mr Hunt will present the spring Budget on 15 March.

Daniel Casali, chief investment strategist at Evelyn Partners, said the ONS reading will encourage the belief that UK inflation has peaked: “Another slowing in annual inflation, the second since October’s peak of 11.1%, will add to the newfound sense of optimism in the UK economy, triggered by last week’s surprisingly positive monthly GDP growth data.

“But these are fairly marginal decelerations in prices, inflation remains elevated, and together with likely negative annual GDP growth in 2023 this remains a risk for both markets and households. The Bank of England will welcome softening inflation, but for its rate-setters the receding of price pressures has some way to go before they take the foot off the rates pedal.”

Andrew Tully, technical director at Canada Life, said: “Today’s numbers will offer little by way of comfort. While inflation may be ‘cooling’ from the peak of last year, we will see prices for everyday goods and services continue to rise, just not quite as quickly as we saw in 2022.

“It really is crunch time as pay deals are negotiated across public and private sectors, with economic forecasts predicting a deep and protracted fall in our living standards. The Bank of England predicts inflation will fall sharply from the middle of the year, but not approaching the 2% target for a further two years. “

12 January: Analysts Expect Fed To Take Foot Off Interest Rate Pedal

Inflation in the United States eased to 6.5% in the year to December 2022, down from 7.1% recorded a month earlier. The decrease is in line with expectations, Andrew Michael writes.

The All-Items Consumer Price Index figure, produced by the US Bureau of Labor Statistics and reported today (Thursday), represents the smallest 12-month increase since autumn 2021.

Despite remaining at a multi-decade high, the latest all-items reading means US consumer prices as a whole have continued to fall for six consecutive months.

The Bureau said a fall in the price of fuel was the main contributor in helping to bring down the overall inflation figure, but that this had been offset by rising housing and food costs.

In December, the Federal Reserve, the US central bank equivalent of the Bank of England, raised its target benchmark interest rates by 0.5 percentage points to stand in a range between 4.25% and 4.5%, a 15-year high.

The move followed four consecutive rate rises of 0.75 percentage points that began last summer and, according to City commentators, the Fed’s tactic appears to be paying off.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Inflation in the US continues its downward trajectory coming in at 6.5% in December, a number that is likely to be positive for markets hoping that the Federal Reserve slows its rate hiking schedule. 

“Indeed, this print should point to a 0.25 percentage point rise at the next meeting, rather than what has become the more common 0.5 percentage point hike.”

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said: “Having further confirmation of the downward trend in US inflation is constructive in further rebuilding overall investor sentiment and belief that the Federal Reserve is successful in its task thus far. 

“There is further reason to believe that the Fed’s hiking process is getting to its later stage and that investors can start thinking in terms of opportunities rather than continue fearing inflation threats.” 

Fiona Cincotta, senior financial markets analyst at City Index, said: “US inflation data confirmed expectations that consumer prices cooled further in December, supporting the view that the Fed could slow the pace of rate hikes in upcoming meetings.”

15 December: Rise Takes Bank Rate To 14-Year High Of 3.5%

The Bank of England has raised interest rates for the ninth time in a year in its ongoing attempts to protect the UK economy from the damaging effects of soaring inflation, writes Andrew Michael.

In a widely expected move, the Bank’s rate-setting Monetary Policy Committee (MPC) hiked the Bank Rate by 0.5 percentage points to 3.5% today, its highest level since autumn 2008.

The decision comes despite yesterday’s official figures that showed UK inflation had eased from a 41-year high of 11.1% to stand at 10.7% in the year to November 2022.

Earlier this week, it emerged that annual US inflation had also slowed to 7.1% in November, down from 7.7% reported a month earlier.

Last night, the US Federal Reserve also imposed a 0.5 percentage point rise on its Funds Rate, taking it to a range between 4.25% and 4.5% (see story below).

Both the Bank of England and the Fed are tasked with maintaining inflation over the long term at a level of 2%.

Today’s announcement by the Bank will drive up borrowing costs almost immediately for more than two million UK mortgage customers who have taken out home loans based on either variable rate or tracker deals.

Those on fixed rates will not see a change in monthly payments immediately but may be faced by more expensive loans when they come to the end of their current deal.

The Bank said that the MPC’s nine-strong committee voted 6-3 in favour of today’s decision. Of the three dissenters, two members favoured maintaining the Bank Rate at 3%, while one called for a hike of 0.75 percentage points.  

Explaining its decision to raise interest rates, the Bank said that, while most indicators of global supply chain bottlenecks had shown signs of easing, “global inflationary pressures remain elevated”.

It added: “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.”

Russ Mould, investment director at AJ Bell, said: “Even though there are signs of inflation easing, it remains significantly higher than both the Bank of England’s and the Fed’s 2% target. The jobs market is also too strong to suggest that the central banks will halt further rate rises.

“Raising rates makes it more expensive for consumers and businesses to borrow money and theoretically causes a reduction in spending and investment, which should help to ease the economy and bring down prices. This takes time to work its way through the system and so central banks will continue their rate hiking path until there is adequate evidence to support a shift in policy.”

Jenny Holt, managing director for customer savings and investments at Standard Life, said: “Our analysis shows that even with an interest rate of 3.5%, higher than what is currently available on almost all easy-access savings accounts, savings of £10,000 will be reduced to around £8,680 in real terms after two years if inflation remains at 10%.

“These figures highlight the importance of ensuring your savings are working as hard as possible for you. If your savings are earning just 1% interest then the real value after two years is around £8,260, a difference of £420.”

The European Central Bank (ECB), in line with both the Bank of England and the US Federal Reserve, has raised its main borrowing cost by 0.5 percentage points – to 2.5% – in a bid to reduce inflation across the Eurozone.

The ECB described inflation as too high: “Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target”.

By raising rates in smaller increments than of late, central banks are responding to signs that inflation may have peaked in many countries. However, major global economies appear increasingly likely to slip into recession in the coming months.

Anna Stupnytska, global macro economist at Fidelity International, said: “The hawkish tone of the ECB statement suggests it is preparing markets for further tightening via rate hikes and quantitative tightening.”

The next Bank of England Bank Rate announcement will be on 2 February 2023.

14 December: Funds Rate Ceiling Up To 4.5% In Battle Against Rising Prices

The United States Federal Reserve – the US equivalent of the Bank of England – has raised its target benchmark interest rate by 0.5 percentage points in a bid to contain inflation, Andrew Michael writes.

The Fed’s funds rate now stands in a range between 4.25% and 4.5%, a 15-year high, with more increases expected in 2023. Analysts believe it may peak between 5% and 6%.

The Bank of England is expected to increase its Bank Rate by a similar measure when it announces its latest decision tomorrow (Thursday) – this would take the rate from 3% to 3.5%.

Today’s hike by the Fed’s rate-setting Federal Open Market Committee was widely expected. It halts a run of four consecutive 0.75 percentage point rises that began in the summer.

The tempering of the rate of increase follows yesterday’s official figures that showed US inflation had eased to 7.1% in the year to November 2022, its lowest reading in 12 months, and down from 7.7% the previous month (see story below).

Earlier today, it emerged that UK inflation had also eased slightly from a 41-year high of 11.1% to stand at 10.7% in the year to November.

Countries around the world are fighting inflationary pressures caused by a toxic economic cocktail of soaring energy prices and supply chain bottlenecks exacerbated by the war in Ukraine.

The Fed, which is tasked by the US government to keep inflation at 2% per annum, warned that further rises in the funds rate will be necessary in 2023: “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”

It said a range of factors are causing price increases: “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity.”

Today’s pivot to a smaller rate rise is also likely to be mimicked tomorrow by the European Central Bank, which is tipped to favour the 0.5 percentage point increase.

Commenting on the Fed’s move, Richard Carter, head of fixed interest research at Quilter Cheviot, said: “This will buoy some investors who may see this as a signal of a corner turned in the fight against inflation. The Fed clearly has confidence in its aggressive stance and feels it is working but won’t want to let off the pedal yet.

“Markets may be thinking a soft landing will be achieved and that a pause or a pivot back to looser monetary conditions could soon return, but the Fed’s hawkishness won’t simply end on one piece of good news.

“Inflation may be heading back down, but it is still very much present in the system. Indeed, service inflation remains a concern and will become the next key metric to watch. Despite the positive news, there is still a great deal of uncertainty over the future of the economy and the direction of interest rates.

14 December: Rate Reduction Eases Upward Pressure On Interest Rates

UK inflation eased slightly from a 41-year high of 11.1% to stand at 10.7% in the year to November 2022, according to the latest figures from the Office for National Statistics (ONS) out today, writes Andrew Michael.

A decrease in the Consumer Prices Index (CPI) will raise hopes that a pivotal moment has been reached in a year of soaring prices and ease the pressure on the Bank of England before it reveals its last interest rate-setting decision of 2022 tomorrow (Thursday).

Over the past 12 months, the Bank has raised its influential Bank Rate eight times to its current level of 3% in a bid to stave off rising prices.

On a monthly basis, the ONS said that CPI rose by 0.4% in November this year, compared with a rise of 0.7% in the corresponding month last year.

It added that the falling cost of transport, especially motor fuels, was the largest downward contributor to the latest inflation reading. But this was partially offset by rising prices in restaurants and pubs.

Grant Fitzner, ONS chief economist, said: “Although still at historically high levels, annual inflation eased slightly in November. Prices are still rising, but by less than this time last year with the most notable example of this being motor fuels. Tobacco and clothing prices also rose, but again by less than we saw this time last year.”

Despite today’s announcement, inflation remains stubbornly in double figures thanks to a combination of economic conditions including soaring energy prices exacerbated by the war in Ukraine and global supply chain bottlenecks.

Tomorrow, the Bank of England is expected to raise interest rates again – with forecasters predicting a half percentage point hike to 3.5% – as it attempts to tackle soaring prices against an increasingly recessionary backdrop.

This is a major week for central banks worldwide, with the US Federal Reserve expected to raise interest rates later today, with a similar announcement anticipated from the European Central Bank tomorrow.

Responding to today’s inflation figure, Jeremy Hunt, the Chancellor of the Exchequer said: “Getting inflation down so people’s wages go further is my top priority, which is why are holding down energy bills this winter through our Energy Price Guarantee Scheme and implementing a plan to help halve inflation next year.

“I know it is tough for many right now, but it is vital that we take the tough decisions needed to tackle inflation – the number one enemy that makes everyone poorer.”

Some analysts believe that, if the government’s energy price guarantee was not in place to limit average consumption household bills to £2,500 per annum (£3,000 per annum from April 2023), then the inflation figure would be close to 14%.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The decline in CPI inflation in November will relieve the [Bank of England’s rate-setting] Monetary Policy Committee and suggests that the peak rate now lies firmly in the past. Looking ahead, CPI inflation should continue to decline over the coming months.”

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The latest data marks a fall of 0.4%, which is far more palatable than the huge 1% increase seen between September and October of this year. While the slight dip is a step in the right direction, the issue of rising food prices and growing household energy bills remains firmly in place.

“Temperatures have taken a sharp dive in the last week or so, and the demand for gas will no doubt have increased as people are forced to heat their homes. As the autumn has been rather mild, we will only now begin to see the real impact of higher energy bills. While the government support remains in place for now, any changes made once the April deadline is reached could have a knock-on effect on inflation.”

13 December: Annual US Rate Tumbles To 7.1% In Year To November

Inflation in the United States slowed to 7.1% in the year to November, down from 7.7% recorded a month earlier, taking the latest figure to its lowest annual rate since December 2021, Andrew Michael writes.

The US Bureau of Labor Statistics reported today (Tuesday) that consumer prices rose by 0.1% between October and November this year, having increased by four times that rate in the month to October.

According to the Bureau, housing “was by far the largest contributor to the monthly all-items increase, more than offsetting decreases in energy indexes”.

The pace of annual consumer price growth eased back by more than expected last month – forecasters had expected a figure of 7.3% – supporting the case for the Federal Reserve, the US central bank, to reduce the severity of its recent monetary tightening policy.

In November, in a bid to tame soaring inflation levels caused by a damaging combination of economic conditions including soaring energy prices, the Fed raised its target benchmark interest rate by 0.75 percentage points, a history-making fourth increase of this size in a row.

The Fed funds rate now stands in a range between 3.75% and 4%, the highest level since January 2008 at the height of the global financial crisis.

The Fed’s next rate-setting decision is revealed tomorrow (Wednesday 14 December). A day later, the Bank of England and the European Central Bank will separately announce their last rate-setting decisions of the year.

All three central banks are still expected to raise rates, although there is less consensus about by how much.

Reacting to today’s announcement, the influential S&P 500 stock index rose 3%, while the technology-heavy Nasdaq 100 jumped 4% as major US tech and internet stocks rallied in pre-market trading leading to broad-based gains.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Inflation continues to move in the right direction for the US, with today’s print coming in lower than expectations. As a result, the Federal Reserve will feel vindicated in its aggressive stance, while the markets will begin to think that the pain of tighter monetary conditions could soon be over.

“While the war against inflation is turning, we are a long way off declaring victory and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession. We are still likely to see at least a 50 basis point rise in interest rates tomorrow and we cannot rule out further moves should other data points refuse to budge as quickly as investors would like.”

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said: “In our view US CPI inflation, for this cycle, peaked at 9.1% in June. If a US recession does materialise, the chances are that it will not be deep. Strong employment and consumption, along with high personal cash holdings, provide some comfort here.”

30 November: Interest Rate Hike Still On Cards As Inflation Stays In Double Figures

Eurozone inflation fell to 10% in the year to November, down from 10.6% a month earlier, according to preliminary figures issued today, Andrew Michael writes.

This was the first fall in nearly 18 months. However, with the rate still five times the EU’s target of 2%, forecasters believe the European Central Bank will raise interest rates across the bloc by half a percentage point when its governing council next meets on 15 December.

The ECB has already raised rates by three times this year. The eurozone’s deposit rate currently stands at 1.5% having been in negative territory as recently as August this year.

The Bank of England will also announce its next decision on the Bank Rate – currently 3% – on 15 December.

A drop in European wholesale energy prices combined with an easing in supply chain bottlenecks has recently raised hopes that eurozone inflation is starting to ease, despite increases in food prices.

US inflation has also broadly edged down in recent months, in contrast to the UK where consumer prices have continued to rise. Earlier this month, the UK recorded an inflation figure of 11.1% in the year to October 2022, a 41-year high.

The Bank of England, European Central Bank and Federal Reserve in the US share the common aim of maintaining financial stability in their respective regions. Each has a long-term inflation target of 2%.

David Goebel, associate director of investment strategy at Evelyn Partners, commented on the inflation rate fall: “This will certainly be a welcome development for citizens and policymakers. These latest readings will give consumers and investors some hope that the worst of this inflationary episode could be in the rear-view mirror.”

16 November: ONS Points To Rising Energy And Food Bills

UK inflation accelerated to a 41-year high with a reading of 11.1% in the year to October 2022, according to the Office for National Statistics (ONS), writes Andrew Michael.

The increase in the Consumer Prices Index (CPI) – up from a figure of 10.1% recorded in the 12 months to September – has been driven by rising energy bills and is the country’s highest inflation level since October 1981.

The ONS said the CPI rose 2% in October compared with September, an increase that was almost double the figure of 1.1% recorded for the same period last year.

Grant Fitzner, ONS chief economist, said: “Rising gas and electricity prices drove headline inflation to its highest level for over 40 years, despite the Energy Price Guarantee. Over the past year, gas prices have climbed nearly 130%, while electricity has risen by around 66%.”

Mr Fitzner added that increases to a range of food items also pushed up the inflation figure, although this was partially offset by a decline in motor fuels including a fall in the cost of petrol.

With inflation already in double figures from September, a further hike to the latest rate will be a difficult pill to swallow for households already embroiled in a severe cost-of-living crisis.

Earlier this month, the Bank of England raised interest rates for the eighth time in less than year, piling extra financial pressure on to the UK’s two million households with variable rate mortgages.

Tomorrow, the government is expected to unleash a brutal Autumn Statement combining steep tax rises with swingeing spending cuts.

Responding to today’s inflation figure, Jeremy Hunt, the Chancellor of the Exchequer, said: “The aftershock of Covid and Putin’s invasion of Ukraine is driving up inflation in the UK and around the world. This insidious tax is eating into pay cheques, household budgets and savings, while thwarting any chance of long-term economic growth.

“It is our duty to help the Bank of England in their mission to return inflation to target [of 2%] by acting responsibly with the nation’s finances. That requires some tough but necessary decisions on tax and spending to help balance the books. 

“We cannot have long-term, sustainable growth with high inflation. Tomorrow I will set out a plan to get debt falling, deliver stability, and drive down inflation while protecting the most vulnerable.”

Rachel Winter, partner at Killik & Co, said: “UK inflation has increased to a new 40-year high, putting further strain on household budgets already at breaking point as we edge closer to Christmas. Despite a more stable political landscape, the economy continues to suffer, with third quarter figures showing a decline in GDP and the nation braced for recession.

“The pound is continuing its gradual recovery against the dollar, but while in the US CPI inflation has slowed, the UK has not been as fortunate, and the Bank of England has said we are unlikely to see any significant drop in inflation for many months to come.”

10 November: Dollar Slides As Fears Of Aggressive Rate Hikes Subside

Inflation in the United States slowed to 7.7% in the year to October, down from 8.2% recorded a month earlier, taking the figure to its lowest annual level since the start of this year, Andrew Michael writes.

The US Bureau of Labor Statistics reported today that consumer prices rose by 0.4% month-on-month. This was less than expected, but likely to be at enough of an elevated pace to keep the country’s central bank on track to carry out further interest rate hikes.

The Bureau said that housing, fuel and food each contributed to the latest month-on-month increase. But it added that once items such as food and energy were stripped out, so-called ‘core’ inflation rose by 0.3% in October, half the figure recorded for the same measure a month earlier.

The pound rose sharply to just over $1.16 following the news of a surprise cooling in US inflation. Today’s data boosted hopes that the US Federal Reserve will ease off from further aggressive interest rate rises putting pressure on the dollar.

Earlier this month, the Fed further attempted to rein in soaring levels of inflation by raising its target benchmark interest rate by 0.75 percentage points, a history-making fourth increase of that size in a row.

Announcing its most recent hike, the Fed anticipated that “ongoing increases” to US interest rates would be necessary for its inflation-beating policy to be “sufficiently restrictive” to return levels to its longstanding target of 2%.

The latest inflation data follows immediately in the wake of the US mid-term elections that have been taking place this week and where the anticipated ‘red wave’ of support for the Republican party has failed to materialise.

Despite this, the party looks likely to take control of Congress’s lower chamber, the House of Representatives. The race for control of the Senate remains evenly poised with four state results yet to be announced.

Stuart Clark, portfolio manager at Quilter Investors, said: “US inflation has once again fallen, giving some momentum to the idea that the worst is now behind us. The rate is lower than expectations and this will provide some relief to consumers and the wider market, although it is worth noting food and shelter are still increasing, so we’re not completely out of the woods yet.

“Inflation also remains stubbornly high and, as such, the Federal Reserve is going to remain in a hawkish mood for some time to come.”

Samuel Fuller, director of Financial Markets Online, said: “Policymakers have got their wish. The signs are that a series of rapid interest rate rises may finally be taming rampant inflation. Prices are cooling faster than expected in the US, which makes a 0.75% rate rise next month extremely unlikely.

“This is going to calm nerves on both sides of the Atlantic because the data offers the tantalising promise of calmer waters where rate setters don’t have to wreck economies to bring inflation under control.”

3 November: Bank Of England Follows US Federal Reserve With 0.75 Percentage Point Hike

The Bank of England has raised interest rates for the eighth time in less than a year in a bid to shield the UK economy from the damaging effects of soaring inflation, writes Andrew Michael.

In an expected move, the decision by the Bank’s rate-setting Monetary Policy Committee (MPC) to raise the Bank rate by 0.75% percentage points to 3% is the largest hike of its type since policymakers scrambled to defend sterling on Black Wednesday in 1992.

The MPC’s nine-strong committee voted 7-2 in favour of today’s decision. 

Explaining the move to hike rates, the MPC pointed to a “very challenging outlook for the UK economy”. The Bank of England has a mandate, set by government, to maintain inflation over the long term at a level of 2%.

The MPC added that it expects the UK “to be in recession for a prolonged period” and warned that consumer price inflation “would remain elevated at levels over 10% in the near term”. Consumer prices in the year to September rose by 10.1%.

The Bank rate is important because it affects both the cost of borrowing as well as the amount of interest paid by banks and building societies to savers with cash on deposit. The last time the Bank rate stood at today’s level was in November 2008.

Today’s news follows less than 24 hours from the US Federal Reserve’s decision to hike interest rates – also by three-quarters of a percentage point – their fourth rise of this magnitude in the past five months (see story below).  

Last week, the European Central Bank hiked interest rates across the eurozone by the same amount, the second rise of this size in two months.

Today’s decision by the Bank of England will drive up costs swiftly for around 2.2 million UK mortgage customers that have taken out either variable rate or tracker home loans. Those on tracker arrangements, which mirror movements in the Bank rate, will experience an immediate impact in payments.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said today’s news is unlikely to provide an overnight big bang where rates rise significantly: “With the big high street banks stuffed full of lockdown savings, they’re happy to continue offering miserable rates – typically under half a per cent.”

Jeremy Hunt, Chancellor of the Exchequer, said: ‘Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country. Today the Bank has taken action in line with its objective to return inflation to target. The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.”

Alice Haine, personal finance analyst at Bestinvest, said: “Increasing interest rates when the economy is already in a recession is not a typical course of action for a central bank, but these are exceptional times and the Bank of England had to act to tame double-digit inflation, which is constraining expenditure for companies and consumers alike.

“Higher interest rates will pile more pressure on household finances already battered by the toxic mix of high prices, falling real incomes, soaring borrowing costs and the effects of a recession. Expectations of higher taxes and spending cuts to come when the Chancellor unveils his budget on 17 November means the hit to the consumer wallet will continue as Britain tightens its belt to plug the shortfall in public finances.”

The next Bank rate announcement will be on 15 December.

2 November: Fourth US 0.75 Percentage Point Rise In Succession Makes History As Rate Hits Highest Level Since 2008

The United States Federal Reserve has further attempted to rein in soaring levels of inflation by raising its target benchmark interest rate by 0.75 percentage points, a history-making fourth increase of this size in a row, Andrew Michael writes.

The Fed funds rate now stands in a range between 3.75% and 4%, the highest level since January 2008 at the height of the global financial crisis.

Countries around the world are fighting inflationary pressures caused by a cocktail of economic conditions from record energy prices and the war in Ukraine to post-pandemic supply chain bottlenecks.

Announcing today’s widely expected move by its decision-making Federal Open Market Committee, the Fed said that “ongoing increases” in the Fed funds rate will be necessary for policy to be “sufficiently restrictive” to return inflation back to its long-standing target of 2%.

This is the same target as the Bank of England, which reveals its latest interest rate decision tomorrow (Thursday). UK interest rates currently stand at 2.25% having been hiked seven times by the Bank since December 2021.

Analysts expect the Bank to raise the rate to 2.75% or, more likely, 3%.

US inflation has broadly edged down in recent months with annual prices rising by 8.2% in the year to September, a slight dip from the 8.5% recorded in the 12 months to July.

However, data released since the Fed’s last rate announcement in September shows consumer price growth accelerating across a wide array of goods and services, suggesting underlying inflationary pressures are becoming entrenched.

Last week, the European Central Bank raised its key interest rate by 0.75% points for the second time in consecutive months. Deposit rates, which were negative as recently as August, now stand at 1.5% across the eurozone.

The Fed’s next rate-setting announcement takes place on 14 December.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “There remains a great deal of uncertainty over where rates will eventually peak, and there is a real concern that the Fed will end up over-tightening and will tip the US into a painful recession as a result.

“Today’s statement suggests the Fed still feels it has a long way to go in its battle to tame inflation, but we can expect the pace of future rate rises to slow as we head into the new year which should provide investors with some comfort.”

Sonia Meskin, head of US macro at BNY Mellon Investment Management, said: “The real question for investors is the trajectory of policy going forward. We believe there is a 50% chance that the Fed will hike by another 75 basis points in December, and a 50% chance it will hike by 50 bps.”

“Either way, both the Fed’s and our forecasts suggest the policy rate will stabilise between 4.5 to 5.0% early in 2023, though persistently high inflation is a notable upside risk to this forecast.”

31 October: ONS To Use Reduced Energy Costs In Calculations

The Office for National Statistics (ONS) will use subsidised energy unit prices when calculating the Consumer Price Index over the coming months, a move which will reduce the headline rate of inflation, writes Jo Groves.

Lower unit prices are a result of the government-funded Energy Price Guarantee for domestic consumers and the Energy Bill Relief Scheme for non-domestic consumers. 

Reduced prices for business users will be reflected in the input Producer Price Index, which measures the cost of raw materials used in production.

The size of the reduction has not been quantified and it will only be temporary, since both schemes are only scheduled to operate until April 2023.

The ONS announced in August that the £400 discount on domestic energy bills under the Energy Bills Support Scheme (EBSS) would be treated as increasing household income, rather than reducing expenditure. As a result, this scheme does not affect CPI calculations.

The EBSS will see £400 taken off every households’ electricity bills, spread over the six months from October 2022 to March 2023. 

It remains to be seen how the above changes will affect the ONS inflation figures for October, due for release on 16 November 2022.

The government will give an Autumn Statement the following day, reviewing the public finances and setting out policy objectives. This may include details of government support for energy consumers from April 2023 onwards.

27 October: Further ECB Hikes Expected In Battle To Stem Inflation

The European Central Bank (ECB) has raised its key interest rate by 0.75 percentage points in an attempt to head off soaring inflation levels across the eurozone, Andrew Michael writes.

The move follows an increase of the same magnitude in September, and marks the third rate rise in as many months for the 19-member single currency bloc. The deposit rate, which was negative until August, was raised from 0% to 0.75% and has now doubled to 1.5% following today’s increase.

The scale of the ECB’s latest rise is on a par with the last three rate hikes imposed by the Federal Reserve on US borrowing costs.

The Bank of England has, so far, contented itself with moves of half a percentage point or less on the seven occasions it has raised the Bank rate since December last year to its current level of 2.25%. The Bank’s next rate-setting announcement will be made on 3 November.

The ECB said it expects to hike rates further in a bid to tame inflation. The inflation rate in the euro area stood at 9.9% in the year to September. The latest figures for the UK and US are 10.1% and 8.2% respectively.

All three central banks have an inflation target of 2%.

Today’s move, which pushes the deposit rate up to its highest level since 2009, had been widely expected by economic forecasters. It suggests eurozone rate-setters are not yet ready to slow the pace of monetary tightening, despite mounting political criticism.

Georgia Meloni, Italy’s recently-elected prime minister, said recently that tighter monetary policy was “considered by many to be a rash choice”. 

Her views echoed similar concerns from Emmanuel Macron, France’s president, who warned about central banks “smashing demand” to tackle inflation across the bloc.

In a statement, the ECB said: “In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation. The Governing Council’s monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations.”

Anna Stupnytska, global economist at Fidelity International, said: “With today’s decision widely expected, the main focus now is on the rate trajectory. The ECB continues facing a sharp trade-off between high inflation and a rapidly deteriorating economic outlook, with a looming recession on the horizon.

“As the global energy crisis unfolds with Europe bearing the brunt, the ECB’s window of opportunity for aggressive frontloading of policy tightening is shrinking rapidly. Today’s move is likely to be the last jumbo hike in this cycle.”

19 October: September Rate Up From 9.9%, Back To July Level

UK inflation has burst through the double figure mark once again with a reading of 10.1% in the year to September 2022, according to the Office for National Statistics (ONS), writes Andrew Michael.

The latest rise in the Consumer Prices Index (CPI) – from a figure of 9.9% recorded in the 12 months to August – means that inflation is at the same level as July, dashing hopes that rising prices were starting to tail off.

September’s CPI reading is important because it is one of the three measures used by the government – alongside wage growth and a minimum uplift rate of 2.5% – to determine the pension triple lock guarantee.

Assuming the government sticks to the triple lock arrangement, today’s figure – which is the largest of the three measures – means that state pensions will rise by 10.1% from the start of the tax year next April.

However, there are a number of reports that the Prime Minister and her Chancellor will break the pledge to use the highest of the three figures given that inflation is so high.

The ONS said the CPI rose 0.5% in September compared with August, a larger increase over the same month than in 2021 when the index rose 0.3%. The main drivers behind rising prices came from food, non-alcoholic drinks and transport, although the continued fall in the price of motor fuels made the largest, partially offsetting, downward contribution to the change in the rate.

Darren Morgan, director of economic statistics at the ONS, said: “ After last month’s small fall, headline inflation returned to its high seen earlier this summer. The rise was driven by further increases across food, which saw the largest annual rise in over 40 years, while hotel prices also increased after falling this time last year.”

The re-emergence of double-digit inflation will be a difficult pill to swallow for households – enduring the worst cost-of-living crisis in years – government ministers and the Bank of England alike. It shows that price rises have yet to peak, despite an energy price guarantee limiting gas and electricity bills this winter.

In recent months the UK, along with many countries worldwide, has felt the impact of inflationary headwinds as a result of soaring energy prices, a squeeze in the post-pandemic global supply chain and the war in Ukraine.

The Bank, which has a mandate from the government to keep inflation to 2%, repeatedly warned this summer that rising prices could hit 13% this winter and remain at elevated levels throughout 2023, although it has since revised this forecast down to 11%.

Last weekend, the Bank’s governor, Andrew Bailey, did not rule out a substantial rise in interest rates – possibly as much as an entire percentage point – to combat rising inflation when the Bank’s rate-setting Monetary Policy Committee (MPC) convenes early next month. 

The Bank rate currently stands at 2.25% having been hiked seven times in under a year. The next Bank rate announcement will be on 3 November.

Marcus Brookes, chief investment officer at Quilter Investors, said: “The dip in inflation seen in August appears to have been a fluke, and with the rapidly changing environment we are currently living in we are unlikely to see inflation fall for some time yet.

“As we head towards the winter and demand for gas increases, we will begin to see higher energy bills really come into play. While Prime Minister Liz Truss’s energy plan means they are capped at £2,500 for now [per annum, for a household with average consumption], it has been made very clear that this iteration of government support [the Energy Price Guarantee] will not be in place for as long as was once promised, and this could well have a knock-on effect on inflation.”

The Chancellor, Jeremy Hunt, announced on Monday that, instead of operating for two years from 1 October, the Guarantee will now only be in place until April 2003.

Samuel Tombs, chief economist at Pantheon Macroeconomics, said: “September’s consumer prices figures maintain the pressure on the Bank of England’s MPC to hike the Bank Rate substantially at its next meeting on November 3, despite the developing recession.

“Looking ahead, we continue to expect the headline rate of CPI inflation to rise to nearly 11% in October, primarily due to an increase in consumer energy prices.”

13 October: Annual Trend Down Despite Month-On-Month Uptick

Inflation in the United States continued to edge lower last month, but at a slower than expected rate, writes Andrew Michael.

Today’s figures from the US Bureau of Labor Statistics show that the consumer prices ‘all items’ index rose by 8.2% in the year to September 2022, down from the 8.5% increase recorded in July.

The 0.1 percentage point dip was half the figure predicted by forecasters.

The Bureau said increases to the cost of housing, food and medical care over the month were partly offset by a fall in the price of gasoline. But it noted that the cost of natural gas and electricity both rose over the same period.

On a monthly basis, the Bureau reported that consumer prices rose by 0.4% between August and September. This compared with an increase of 0.1% from July to August 2022.

The Bureau’s core consumer prices reading for September, that excludes both food and electricity, came in at 6.6%, a 40-year high. This was above the 6.5% that was expected, as well as August’s figure of 6.3%.

Today’s news will increase pressure on the Federal Reserve, the US central bank, to continue its aggressive monetary tightening policy, including increasing interest rates. 

Yesterday, the Fed indicated that it was more concerned about not doing enough to head off soaring US inflation, than doing too much.

Minutes released from its September 2022 meeting, at which the Fed imposed its third consecutive 0.75 percentage point rate rise, showed that central bankers remained committed to “purposefully” tightening monetary policy in the face of “broad-based and unacceptably high inflation”.

US benchmark interest rates currently stand in the range 3% to 3.25%. The Fed’s next rate-setting announcement will be made on 2 November.

The Fed’s stated objective is to achieve maximum employment and inflation at the rate of 2% over the long run – the same rate as the Bank of England.

The UK’s inflation figure will be announced next Wednesday, 19 October. The Bank of England is scheduled to make its next Bank rate decision on 3 November.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “As was widely expected, today’s US CPI numbers once again showed that inflation is gradually easing on the back of lower gasoline prices, dipping to 8.2% in the 12 months to September compared to 8.3% in August.”

He added: “Despite cooling off slightly, inflation remains high and we would therefore expect to see another 0.75% interest rate hike at the next meeting and for the Federal Funds rate to be close to 4.5% by year-end. Investors continue to pray for a Fed pivot, but they may need to be patient.”

12 October: Manufacturing Slumps As Economy Edges Towards Recession

Figures out today from the Office for National Statistics show that UK gross domestic product (GDP) fell by an estimated 0.3% in August.

July’s positive figure for GDP – a measure of the value of goods and services produced in the UK – has also been revised down from 0.2% to 0.1%. The ONS says there has also been a continued slowing in the rolling three-month rate, with GDP for the three months to August also down 0.3% on the three months to May.

A 1.6% decline in manufacturing output is seen as the prime cause for August’s decline, with firms trimming production because of higher energy prices and a slump in consumer demand.

The service sector saw an 0.1% fall in August after growing 0.3% in July while construction grew by 0.4% on the back of a 1.9% increase in new building projects. Infrastructure (5.3% growth), private industrial (4.3%) and private housing new work (1.7%) were the main contributors to the positive construction sector number.

Commenting on the figures, Jonathan Moyes, head of investment research at advisors Wealth Club, said: “It’s hard to find many positives in the data, although the construction sector continues to be an area of strength. With a significant tightening of financial conditions through September and October, there is certainly a chill in the air. These numbers are a sign of the winter to come. 

“The market’s attention will remain firmly fixed on both the Chancellor and the Bank of England as they look to restore confidence and stabilise the government bond market. 

“With inflation remaining high, the bank is unlikely to see weak GDP as cause for softening [interest rate] policy. The government, on the other hand, is clearly looking to stave off a severe recession with loose fiscal policy. We look forward to the detail on how this will be funded.”

Chancellor Kwasi Kwarteng will announce details of his fiscal policy on 31 October.

11 October: Market Intervention Extended To Index-Linked Gilts

The Bank of England has today widened its bond market intervention – this time to include inflation-linked gilts – in an attempt to forestall a sharp sell-off in UK government debt, writes Andrew Michael.

In a statement yesterday, the Bank said it was taking “additional measures” to bolster the emergency support package it launched in September, which is due to close at the end of this week.

This included upping the size of potential daily gilt purchases from £5 billion to £10 billion.

However, in a statement this morning, the Bank has said it is extending its bond-buying programme to include index-linked gilts – government bonds whose interest rate moves in line with inflation.

Today’s announcement comes into effect immediately and lasts until Friday, alongside the Bank’s existing daily conventional gilt purchase auctions.

The Bank said: “These additional operations will act as a further backstop to restore orderly market conditions.”

Bonds are a form of IOU that governments and companies issue when they want to borrow money. In return for a loan, the bond’s issuer pays interest to a bond’s interest over a set period until the life of the IOU expires, which is when the initial loan is also repaid.

The price of UK government bonds, or gilts, fell sharply in the wake of the mini-budget on 23 September, forcing an intervention from the Bank to prevent what it described as a “material risk to financial instability” and reducing “any risks from contagion to credit conditions for UK households and businesses.”

Victoria Scholar, head of investment at interactive investor, said: “The Bank has expanded its intervention into the UK government debt market to offset the market’s ‘dysfunction’ and stem financial contagion. 

“The UK central bank is adding inflation-linked gilts to its purchases, buying up to £5 billion a day amid concerns about the impact of the declines in the bond market on pension funds. It comes a day after the Bank of England expanded its measures by introducing short-term funding for banks to help ease the squeeze on pension funds. 

“UK government bonds are attempting to regain ground this morning after yesterday’s sharp sell-off.”

10 October: Bank Increases Today’s Daily Buying Limit To £10 Billion

The Bank of England (BoE) has announced extra measures to keep the UK’s financial markets working, following last month’s turmoil that affected the pensions industry in the wake of the government’s mini-Budget, Andrew Michael writes.

In a surprise move, the BoE launched a major intervention in the UK government bond, or gilt, market at the end of September to prevent what it described as a “material risk to financial instability”.

The decision, which involved a temporary scheme to buy gilts worth billions of pounds, was made following the Chancellor of the Exchequer’s financial statement that sent shockwaves through the markets and exerted huge liquidity pressures on UK pension funds.

In a statement today, the BoE said it will take “additional measures” to broaden its support as it prepares to end its emergency package this Friday.

The initial package, designed to last a fortnight, saw the BoE promise to buy up to £65 billion of gilts at the tune of £5 billion a day. Gilt purchases made by the BoE are carried out using an auction process.  

So far, the UK’s central bank has only bought around £5 billion in gilts, having calmed the initial market panic that saw bond prices plunge and prompted pension funds into forced sales of assets to meet complex financial obligations that underpin their solvency.

With that support ending at the end of this week, the BoE said it is primed to increase the size of its daily gilt purchases up to £10 billion a day throughout this week.  

In a statement, the BoE said it was “prepared to deploy (this) unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5 billion in each auction.

It added: “The maximum auction size will be confirmed each morning at 9am and will be set at up to £10 billion in today’s operation. The Bank’s existing reserve pricing mechanism will remain in operation during this period.”

Tom Selby, head of retirement policy at AJ Bell, said: “The Bank of England has further loosened its daily gilt buying purse strings as it prepares to wind up the dramatic intervention it first announced on 28 September.

“In addition, it has set out its plan beyond this Friday, when it will stop buying gilts, with a clear-eyed focus on maintaining order in the market and preventing a ‘death spiral’ of forced gilt sales from UK pension funds. However, there remains huge uncertainty over the adjustment period once the Bank steps back from its emergency intervention.”

Kwasi Kwarteng, the Chancellor of the Exchequer, has brought forward his medium-term fiscal plan and the publication of independent UK budget forecasts to 31 October 2022, more than three weeks earlier than previously scheduled, the Treasury said today.

The original plan had been pencilled in for 23 November. It was intended to build on Mr Kwarteng’s mini-budget that contained a proposal for £45 billion in unfunded tax cuts and which prompted a rout on the financial markets and saw the pound plunge in value to a record low against the US dollar.

30 September: ONS Corrects Estimate To Say Economy Grew 0.2% In Second Quarter

The pound has risen back to pre mini-budget levels against the dollar today, as the UK’s official forecaster revised its calculations showing that the country entered a recession during the summer, writes Andrew Michael.

Sterling rose against the dollar to $1.116 this morning, having retreated from its low of just over $1.03 at the start of the week caused by a rout on the markets in response to the government’s recent proposals for a mammoth series of unfunded tax cuts.

The rally came as the Office for National Statistics (ONS) revealed that the UK economy grew by 0.2% in the second quarter of this year, compared with a previous estimate of a 0.1% fall.

This discrepancy in the Gross Domestic Product figure – a measure of a country’s output generated by products and services – appears slight but makes an important difference to its economic status. This is because a recession is usually defined as two consecutive quarters of contraction.

The revised figure means that the UK, despite its precarious standing after a tumultuous week on the markets and in the middle of a severe cost-of-living crisis resulting from steepling levels of inflation, cannot technically be said to yet be in recession. The revision contradicts a recent pronouncement from the Bank of England declaring that this was the case.

Despite the upwards revision, the ONS said that the overall size of the UK economy remains 0.2% below its pre-Covid 19 level.

Given the current economic conditions, City forecasters say it is a case of ‘when’ rather than ‘if’ the UK eventually falls into recession. 

Grant Fitzner, chief economist at the ONS, said: “We’ve published improved GDP figures incorporating new methods and sources. These new figures include more accurate estimates of the financial sector and how the costs facing the health sector changed throughout the pandemic.”

“These improved figures show the economy grew in the second quarter, revised up from a small fall. They also show that while household savings fell back in the most recent quarter, households saved more than we previously estimated during and after the pandemic.”

Danni Hewson, financial analyst at AJ Bell, said: “It’s cold comfort to households struggling to pay their bills, but revised figures suggest the UK economy is not in a recession. At least not yet. To reach that milestone it needs to shrink for two consecutive quarters and, despite previous estimates, Britain actually managed to eke out slim growth in the three months to June.

“But that good news is offset by the bad. Despite the end of lockdowns and life returning to somewhat normal, the UK economy has still not recovered its mojo as its the only G7 country to have failed to claw its way back above pre-pandemic levels.”

Inflation in Germany has soared to double-digit levels for the first time in more than 70 years. Consumer prices in Europe’s largest economy rose 10.9% in the year to September, a sizeable jump from the 8.8% recorded a month earlier.

28 September: Intervention Follows Major Offload Of UK Government Bonds

The Bank of England (BoE) has been forced into taking emergency action on the bond markets today amid market turmoil that has seen the cost of government borrowing rise sharply, Andrew Michael writes.

The BoE has launched a surprise and potentially enormous intervention in government bonds, also known as gilts, to stop what it described as “a material risk to financial instability” in the wake of last Friday’s mini-budget.

In recent days, the pound has weakened dramatically against the dollar and the price of gilts has plunged as the market digested the government’s recent wide-ranging tax-cutting plans that require substantial borrowing to be executed successfully.

Gilts form part of the £100 trillion worldwide bond market and are a type of IOU that the UK government issues when it needs to borrow money. They are hugely important to the UK’s financial system because they have an impact on mortgage rates, pensions and the state of the government’s finances.

Central to the intervention, the BoE, the UK’s central bank, has announced plans to delay an earlier programme of ‘quantitative tightening’ – that required it to sell off bonds – and replaced it instead with a scheme to buy long-dated gilts (those due to mature several years hence).  

The BoE said that it would: “Carry out temporary purchases of long-dated UK government bonds from 28 September.

“The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.”

The BoE’s Financial Policy Committee welcomed the plans for “temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace.”

In reaction to the announcement, sterling fell 1.5% against the dollar taking it to $1.0571, a couple of cents above the all-time low value it recorded against the US currency earlier this week.

In response to today’s move by the BoE, the Treasury said: “The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today in order to restore orderly market conditions.”

Ben Laidler, global markets strategist at eToro, said: “Desperate times call for desperate measures and that’s exactly what we’ve seen from the Bank of England today. In an attempt to put out the fire that’s been raging since last week’s mini-budget, the Bank has come to the rescue of the plunging UK bond market, which had started to shut down the UK’s mortgage market.

“The temporary purchase of long-dated gilts reverses the Bank’s recently announced ‘quantitative tightening’ bond sales plan and has already seen bond prices rise.”

Stuart Clark, portfolio manager at Quilter, said: “By instigating targeted, controlled and, apparently, time-limited intervention, the BoE will try to support the economy in order to avoid a more expensive bailout if conditions continue to materially deteriorate while maintaining independence.

“Above all we need to see the government regain credibility with domestic and international investors and explain how they plan to pay for these tax cuts other than just through borrowing.” 

26 September: Bank Bides Time As Markets Squeeze Sterling

The Bank of England (BoE) has ruled out the need for an emergency hike in the Bank rate after the pound plunged to an all-time low against the dollar earlier today, Andrew Michael writes.

The BoE raised the Bank rate by 0.5 percentage points to 2.25% less than a week ago, the seventh consecutive rate hike since December last year.

In overnight trading in Asia, sterling tumbled to $1.0327 on Monday morning, its lowest value against the dollar since decimalisation was introduced into the UK in 1971.

The fall was precipitated by comments made by the Chancellor of the Exchequer, Kwasi Kwarteng, who hinted that more tax cuts were to come in the wake of last week’s seismic ‘fiscal event’ that was a Budget in everything but name.

In a statement from the BoE, its governor, Andrew Bailey, said the bank’s rate-setting Monetary Policy Committee “will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit”.

Bailey added that the BoE was “monitoring developments in financial markets very closely in light of the significant repricing of financial assets”.

He said: “As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements.”

The MPC is due to meet on 3 November.

Danni Hewson, financial analyst at AJ Bell, said: “It’s been quite a day for markets with London investors waking up to a plummeting pound. There’s no getting away from the fact these are nervous times.“

“The biggest problem the government has at the moment is trust. It’s not that a bold new plan for growth won’t work, it’s that they’ve not demonstrated to either investors or the public that they know how to make it work.”

22 September: More Pain For Borrowers As Bank Rate Hits Highest Level In 14 Years

The Bank of England raised interest rates to 2.25% today. The 50 percentage point from rise from 1.75% puts the Bank rate at the highest level recorded since November 2008, when it stood at 3%. 

However, the rise is not as stark as the 75 percentage point rise that had been feared – this was the scale of increase implemented by the United States Federal Reserve yesterday (see story below).

Five members of the Bank’s nine-strong Monetary Policy Committee backed the 50 percentage point move, with three arguing for a similar rise as the US. One member voted for a 25 percentage point increase.

The latest rise will impact around 2.2 million households on variable mortgage rates. Those on tracker rates – which mirror the movements in the Bank rate by a given margin – will see an immediate impact in payments. 

As an example, the rise will add £62 a month onto the cost of a £250,000 mortgage, or £37 a month onto the cost of a £150,000 mortgage.

Homeowners paying standard variable rates (SVRs), the average of which stands at 5.4% according to Moneycomms.co.uk, will see the rise at their lender’s discretion.

Often banks and building societies raise SVRs in the month following the Bank rate decision, but there is likely to be pressure on lenders not to pass on the full rise as households battle against other soaring costs such as food, energy and petrol.

The estimated 6.3 million households on fixed rate mortgages will feel the impact of this and previous rate rises when they reach the end of the contracted term – typically either two or five years. 

According to the Financial Conduct Authority, more than half of fixed rates are due to expire within the next two years.

The Bank of England has been relying on interest rate rises – today’s being the seventh consecutive since December last year – to tame rising inflation. Its reasoning is that if costs are higher, people will spend less which will bring prices down.

However, while inflation – as measured by the consumer prices index – nudged down slightly to 9.9% in the year to August, due in part to falling petrol and diesel costs, it still remains nearly five times the Government’s target of 2%, prompting criticism that interest rate hikes are failing to have the desired effect.

Despite the Government’s recently-announced Energy Price Guarantee of £2,500 a year on average-consumption energy bills – in addition to the £400 automatic discount that will be applied to all domestic electricity bills this winter – UK households are still braced for higher energy costs from next month.

But the Bank has revised down its inflation rate prediction. It expects a peak just below 11% in October, whereas in August it feared inflation topping 13% by the year end.

Recent ONS figures also revealed that 98% of households blame rising food costs for the hike in day-to-day living costs.

The next interest rate decision to be taken by the Bank’s Monetary Policy Committee will be on 3 November.

The Committee said it will not shy away from further increases in the Bank rate, saying it will take action to return inflation to its 2% target: “Policy is not on a pre-set path. The Committee will, as always, consider and decide the appropriate level of Bank Rate at each meeting.

“The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures. Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary.”

21 September: Battle Against Inflation Sees Further Hefty US Rate Increase

The United States Federal Reserve today raised its target benchmark interest rate by 0.75 percentage points to a range between 3% and 3.25%. This was the third increase in a row of that magnitude.

Announcing the move, the Fed noted that recent economic indicators point to modest growth in spending and production and that job gains have been robust in recent months, with the unemployment rate remaining low.

But it said inflation in the US remains elevated, reflecting supply and demand imbalances related to the coronavirus pandemic, higher food and energy prices, and what it called “broader price pressures”.

It added that Russia’s war against Ukraine and related events are creating additional upward pressure on inflation and are weighing on global economic activity, stressing that it remains “highly attentive to inflation risks”.

The Fed’s stated objective is to achieve maximum employment and inflation at the rate of 2% over the longer run – the same rate as the Bank of England, which announces its latest interest rate decision tomorrow (Thursday). 

In addition to the chunky hike in the target range for the federal funds rate – today’s 0.75 percentage point increase comes on the heels of a similar rise in July (see story 27 July below) – the Fed warned that ongoing increases in the target range “will be appropriate”. 

It expects rates to touch 4.60% next year before falling back.

The Fed will also continue reducing its holdings of US Treasury securities and other debt instruments.

15 September: Kwasi Kwarteng To Focus On Energy And Tax Cuts

Kwasi Kwarteng MP, the UK’s recently appointed Chancellor of the Exchequer, will present a mini Budget on Friday 23 September, writes Andrew Michael.

The “fiscal event” – promised by new Prime Minister Liz Truss as part of her plan to tackle crippling inflation levels and avert exacerbating the cost-of-living crisis this winter – has been delayed by the death of Queen Elizabeth II.

The Chancellor’s announcement will follow next Thursday’s delayed interest rate announcement from the Bank of England, when the UK’s central bank is expected to raise rates from their current level of 1.75% by at least another half a percentage point. 

This itself will follow a similar announcement by the US Federal Reserve on Wednesday.

It is expected that Mr Kwarteng will commit the new-look Conservative government to a radical tax-cutting programme.

Part of the plan will involve tackling the financial squeeze currently being endured by both households and businesses on the back of soaring energy prices. The Energy Price Guarantee, announced by the Prime Minister on 8 September, is lacking detail in several areas, particularly on how it will apply to businesses, so Mr Kwarteng will be under pressure to provide more information of the government’s broader support package.

That said, it is possible Ms Truss may provide more detail herself in the days following the Queen’s funeral on Monday, given that she unveiled the plan in a speech to the House of Commons.

In a bid to boost the UK’s growth rate, the Chancellor is expected to unveil cuts to National Insurance and reverse plans that were due to increase corporation tax rates from 19% to 25% next April.

The Chancellor is also likely to push through a post-Brexit deregulatory initiative and is also thought to be in favour of scrapping a European Union-imposed cap that limits the amount that bankers are allowed to earn in bonuses.

14 September: Falling Pump Prices Trim Rate But Food Costs Still Soaring

UK inflation edged down slightly to 9.9% in the year to August, according to the latest figures from the Office for National Statistics (ONS), writes Andrew Michael.

A dip in the Consumer Prices Index – from a figure of 10.1% recorded in the 12 months to July – was the first downward move since September 2021. The trajectory echoed a similar path to the US inflation figure reported yesterday (see story below) and could be a sign that the recent spike in prices might have peaked.

The reduction is attributed to lower pump prices for petrol and diesel. However, the benefit of lower fuel costs was largely offset by rising food bills.

Despite the decrease in the headline rate, UK inflation remains at nearly five times the 2% target set by the government for the Bank of England (BoE) and continues to pile pressure on consumers and households already in the grip of a cost-of-living crisis.

The BoE has repeatedly warned this summer that UK inflation could peak at around 13% this winter and remain at elevated levels throughout 2023.

The ONS said that, in addition to lower petrol prices, the largest contributions to August’s inflation figure came from housing and household services, transport, food and non-alcoholic drinks.

In recent months the UK, along with many countries worldwide, has felt the brunt of inflationary headwinds as a result of surging energy prices, a squeeze in the post-pandemic global supply chain and the war in Ukraine.

In an attempt to combat rising prices, the BoE recently raised interest rates to 1.75%, the sixth hike since the end of 2021.

Despite coming in slightly lower than the 40-year high reported in July, today’s inflation figure is unlikely to deter the UK’s central bank from announcing a further rate rise, potentially as much as a 0.75 percentage point hike, when the BoE reveals its latest announcement next week.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The headline rate of CPI inflation fell in August for the first time since last September and now looks set to drop sharply next year, thanks partly to the government’s energy price cap.

“Looking ahead, we think the headline rate of CPI inflation will rise to almost 11% in October, driven by an increase in contribution from electricity and natural gas prices. But we’re increasingly confident that October’s rate of CPI inflation will prove to be the peak and that it will ease rapidly in 2023.”

Andrew Tully, technical director at Canada Life, said: “Today’s inflation numbers will do little to reassure households across the country who are struggling to come to terms with increased prices and higher bills, despite the Government’s recent proposal to limit energy bills for the next couple of years.

“The immediate outlook looks bleak, with the BofE predicting the peak of inflation to come later this year at around 13%.”

13 September: Annual Trend Down Despite Month-On-Month Uptick In Prices

Inflation in the United States continued to reverse last month, but at a slower than expected rate, writes Andrew Michael.

Today’s figures from the US Bureau of Labor Statistics show that the consumer prices ‘all items’ index rose by 8.3% in the year to August 2022, down from the 8.5% increase recorded in July.

The 0.2 percentage point dip was half that predicted by economic forecasters. The Bureau said that a 10.6% decrease month-on-month in gasoline prices to August had been offset by rising costs for housing, food and medical care.

On a monthly basis, the Bureau reported that consumer prices rose by 0.1%, compared to a flat reading in July.

Following the news, the pound fell 1% against the dollar – to a low of $1.1578 – reversing gains over the last few days which saw sterling pull away from a near-40 year low.

The latest inflation rate readings are unlikely to divert the US central bank, the Federal Reserve, from continuing with its policy of aggressive interest rate hikes. Its next announcement will be made on Wednesday 21 September.

UK inflation is at a 40-year high of 10.1%, with the latest inflation figure due to be released by the Office of National Statistics tomorrow (Wednesday). The Bank of England will announce its latest base rate decision on 22 September, with the event postponed from this week following the death of Queen Elizabeth II.

Daniel Casali, chief investment strategist at Evelyn Partners, said: “Although the August CPI inflation surprised on the upside, there is still some evidence to show that the annual trend is peaking, at least in the near term. 

“Nevertheless, with annual rates of inflation elevated, the US Federal Reserve will continue to raise interest rates into year end.”

8 September: Euro Bank Imposes Record Rate Hike In Bid To Tackle Inflation

The European Central Bank (ECB) has raised its key interest rate by an unprecedented 0.75 percentage points in an attempt to stem soaring inflation levels across the eurozone, Andrew Michael writes.

The ECB’s governing council said the deposit rate across the 19-member currency bloc would rise from zero to 0.75% – its highest level since 2011 – and warned that further rises are on their way.

Today’s announcement follows July’s half-percentage point hike, the first time interest rate increase in over a decade.

The ECB said: “This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target.”

Today’s move brings Eurozone monetary policy more into line with that of the Bank of England and the US Federal Reserve, which have each raised interest rates multiple times this year.

The euro fluctuated between small gains and losses against the dollar immediately after the ECB’s announcement and currently lies close to parity with the US currency.

Today’s rate rise comes despite mounting fears that the Eurozone will topple into a recession later this year as soaring energy prices – mainly caused by Russia imposing restrictions on key European gas supplies – will place a stranglehold on households and businesses across the region.

Average inflation across the eurozone currently stands at 9.1%, although this rate masks large variations among individual member states. In France and Germany, inflation stands just below the 7% level. But for the Baltic nations of Latvia, Lithuania and Estonia the figure is in excess of 20%.

Consumer prices in the UK rose by 10.1% in the year to July 2022.

Hinesh Patel, portfolio manager at Quilter Investors, said: “Having at long last joined the rate hike club in July with the first ECB interest rate rise for 11 years, it comes as little surprise that a further increase has been introduced today.

“At the margin, increasing policy rates will be a welcome boost for banks and savers who have been financially repressed, yet this cannot solve the energy crisis exacerbated by Russia’s ongoing aggression on Ukraine.”

James Bentley, director of Financial Markets Online, said: “The ECB may have just driven a coach and horses through European unity. 

“Essential economic reforms in the eurozone have been noticeable by their absence during 10 years of low growth, while officials continued to dispense permanently loose monetary policy. With the ECB set to hike interest rates further in coming months, a reckoning is coming.”

31 August: Energy Costs Push Euro Prices To Record High

Inflation in the eurozone soared to a record high of 9.1% in the year to August 2022, as Europe’s cost-of-living crisis deepens, Andrew Michael writes.

The figure is up from 8.9% the previous month, according to an estimate from Eurostat, the statistical office of the European Union. Starting in November 2021, this is the ninth consecutive record for consumer price rises within the single currency bloc.

The latest figure, driven mainly by energy prices along with rises for food, alcohol and tobacco, came in greater than economists’ expectations. The news moves the region closer to double-digit inflation for the first time since the introduction of the euro in 1999.

According to Eurostat’s figures, inflation levels vary considerably by country within the bloc. Top of the list are the Baltic states of Estonia, Lithuania and Latvia, which recorded annual inflation figures to August this year of 25.2%, 21.1% and 20.8% respectively.

France, in contrast, recorded a figure of 6.5%, followed by Malta (7.1%) and Finland (7.6%). The euro area’s largest economy, Germany, saw annual inflation reach 8.8% in August, its highest level in almost 50 years.

In the UK, annual inflation reached 10.1% in the year to July according to the latest figures from the Office for National Statistics.

Fiona Cincotta at City Index, said: “ The fresh record-hit inflation print supports the case for a jumbo-sized rate hike from the European Central Bank in the September meeting.

“No matter how you look at it, the outlook for the region is pretty bleak, with few signs that peak inflation is passing. Instead, the markets are bracing themselves for inflation to keep rising to double digits, possibly as soon as next month.”  

31 August: BRC Sees Leap In Food Prices

Food inflation in the UK accelerated strongly to 9.3% in August 2022, up from 7.0% the previous month, according to figures from the British Retail Consortium (BRC).

The latest figure is the highest rate in almost 15 years and is well above the BRC’s 3-month average rate of 7.2%

The figure for fresh food was 10.5%.

Helen Dickinson, BRC chief executive, said: “The war in Ukraine, and consequent rise in the price of animal feed, fertiliser, wheat and vegetable oils continued to push up food prices. 

“Fresh food inflation in particular surged to its highest level since 2008, and products such as milk, margarine and crisps saw the biggest rises.”

26 August: Global Stocks Slip As Fed Chair Reiterates Aim Of Tackling Inflation

Share prices around the world dipped after US Federal Reserve chair Jerome Powell said the central bank would continue to raise interest rates to reduce the country’s high inflation rate.

Speaking today at the economic symposium held in Jackson Hole, Wyoming, Powell reiterated his commitment to tackle inflation, but warned this course of action could cause “some pain” to the US economy.

Mr Powell said: “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”

Last month, the Fed raised its target benchmark interest rate by 0.75 percentage points to a range between 2.25% and 2.5%. Shortly afterwards, the US reported a fall in inflation from a 40-year high of 9.1% in June 2022 to 8.5% in July.

In the wake of Mr Powell’s Jackson Hole address, the US S&P 500 index was down 1.5%, while the pan-European Stoxx 600 index dipped by 0.5%. In London, the FT-SE 100 sank about 0.5% on the day.

Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said: “Given the backdrop of easing financial conditions since early July, as we expected, we have seen a pushback by Fed Chair Jerome Powell, on the market’s assessment of an immediate pivot by warning against loosening policy sooner rather than later.

“While inflation has started to show signs of a turn, some of the more resilient and persistent components remain elevated. In addition, the labour market remains tight.”

Callie Cox, investment analyst at eToro, said: “It’s significant that Powell’s tone has become aggressive again despite the signs that inflation is slowing. Inflation may be slowing, but it’s still much too high for the Fed’s liking and Powell is willing to risk more growth and job market health to bring it down.”

22 August: Investment Bank Raises Forecast On Back Of Soaring Gas Prices

UK inflation could peak at a near 50-year high of 18.6% early next year because of soaring wholesale gas prices, according to the latest forecast from Citigroup, writes Andrew Michael.

The investment bank says, with gas prices jumping by a quarter last week, the cost of living could reach levels not seen since the 1970s. It says this would force the Bank of England to raise the bank rate to 7% – four times its current level of 1.75% – if demand for higher wages became widespread.

UK and European wholesale natural gas prices are trading at nearly 10 times normal levels, and other forecasters have also raised their inflation predictions.

Last week, rising energy prices was one of the main contributors behind UK annual consumer prices reaching a 40-year high of 10.1% in the year to July 2022.

Citi forecasts that the UK’s retail energy price cap – which limits how much gas and electricity firms can charge for units of energy and standing charges – would be raised to £4,567 in January and then to £5,816 in April.

The cap, set by the energy regulator Ofgem, currently stands at £1,971 a year for a household with typical consumption. The figure for its next scheduled rise in October, which will be revealed at the end of this week, has already been forecast to rise to over £3,500.

Benjamin Nabarro, chief economist at Citi, said: “We now expect CPI inflation to peak at over 18% in January. Even with the economy softening, last week’s data reaffirmed the continued risk that pass-through from headline inflation into wage and domestic price setting could accelerate.”

If the prediction is accurate, the figure would be higher than the UK inflation peak reached after the oil crisis of 1979, when the consumer price index reached 17.8%.

17 August: Double-Digit Inflation Surges To 40-Year High

UK inflation rose to a fresh 40-year high of 10.1% in the year to July 2022, according to the latest figures from the Office for National Statistics (ONS), writes Andrew Michael.

The increase to the Consumer Prices Index (CPI) was higher than economists’ forecasts of 9.8% and will pile extra pressure onto consumers and households already in the grip of a cost-of-living crisis.

The steep increase on the 9.4% recorded in June gives us the first double-digit CPI reading for the UK since February 1982.

The ONS said July’s increase was mainly down to rising prices for food, notably bakery products, dairy, meat and vegetables. Price rises in other staple items, including pet food, toilet rolls, toothbrushes and deodorants, also contributed to the increase.

Grant Fitzner, ONS chief economist, said: “The cost of both raw materials and goods leaving factories continued to rise, driven by the price of metals and food respectively.

“Driven by higher demand, the price for package holidays rose, after falling at the same time last year, while air fares also increased.”

In recent months the UK, along with many countries worldwide, has felt the brunt of inflationary economic headwinds thanks to surging energy prices, a squeeze in the post-pandemic global supply chain and the war in Ukraine.

UK inflation now stands at more than five times the 2% target set by the government for the Bank of England (BoE). The BoE recently forecast that inflation will peak at around 13% by the end of this year and will continue at “elevated levels” through 2023.

In an attempt to combat rising prices, the BoE recently raised interest rates to 1.75%, the sixth hike since the end of 2021. Today’s inflation announcement may prompt a further rate rise when it considers its next move in September.

Yesterday, in another consequence from steepling inflation levels, it emerged that real levels of UK pay fell at the fastest rate for more than 20 years.  

Rachel Winter, partner at Killik & Co, said: “Inflation continues to plague consumer finances. With real wages falling at the fastest rate in 20 years, rising food costs and energy price surges looming over the UK economy, households should brace for the winter.”

Rob Clarry, investment strategist at Evelyn Partners, said: “July’s increase was mainly driven by rising food costs. With changes to energy regulator Ofgem’s price cap in October set to take the inflation rate to around 13%, these are challenging times for UK households. 

“These factors are largely outside of the Bank of England’s control, which means that monetary policy is less effective in tackling them directly.”

One positive that will play into the next inflation rate announcement is the recent fall in fuel prices. Petrol is now selling for around £1.75 a litre, whereas in July it topped £1.90 a litre in some cases.

The United States recent saw a fall in its rate of inflation, with the reduction attributed in part to a fall in pump prices.

12 August: Reduction In Economic Activity Attributed To Jubilee Holidays

Gross domestic product (GDP) figures out today from the Office For National Statistics (ONS) show the UK economy contracting by 0.1% in the second quarter of the year, April to June 2022.

There was a significant 0.6% reduction in June, attributed by the ONS to a reduction in economic activity because of Queen Elizabeth’s platinum jubilee celebrations: “It is important to note that the Jubilee and the move of the May bank holiday led to an additional working day in May 2022 and two fewer working days in June 2022. 

“Therefore, this should be considered when interpreting the seasonally adjusted movements involving May and June 2022.”

The economy actually grew by 0.4% in May following growth of 0.8% in the first quarter of the year. But economists agree that the long-term trend for the economy is towards a recession – generally seen as being when the economy shrinks for two quarters in a row.

The ONS says the services sector fell by 0.4% in the quarter, largely due to a ‘negative contribution’ by human health and social work activities. It says this reflects a reduction in coronavirus (COVID-19) activities.

However, the benefits of an easing of coronavirus restrictions saw growth in other areas, with travel agencies and tour operators doing particularly well along with accommodation and food service activities, and arts, entertainment and recreation activities.

In terms of consumer spending, the ONS says household expenditure fell in real terms (stripping out the impact of inflation) by 0.2% in the second quarter. 

It says we are spending less on tourism, clothing and footwear, food and non-alcoholic beverages, and restaurants and hotels. This was partially offset by higher expenditure on transport, housing and health.

Taking inflation into account, household expenditure actually rose by 2.6% in the quarter, reflecting recent inflationary pressures on the value of this spending. In other words, we are spending more to get less.

Last month the ONS recorded inflation running at 9.4%. The Bank of England says the figure will reach deep into double-digit territory in the coming months.

The next inflation announcement from the ONS will be on 17 August.

The economic contraction in the second quarter may influence the Bank when it meets in September to decide whether to increase the Bank interest rate from its present 1.75%.

Jonathan Moyes, head of investment research at Wealth Club, says: “The current inflationary spike is being driven overwhelmingly by global food and energy prices which, by and large, are outside of the Bank’s control. 

“Higher interest rates in the UK will do little to alleviate those pressures. By looking to stave off any knock-on inflationary pressures, such as higher wages, the Bank risks strangling the life out of the economy without significantly easing the cost-of-living crisis. 

“While the Bank expected a slight contraction in Q2 GDP, the mounting weakness in the UK economy may give it pause for thought before continuing to lift rates higher”.

10 August: Falling Pump Prices Help US Rate To Ease To 8.5%

Inflation in the United States slowed by more than expected last month, in a sign that the recent spike in prices might have passed its peak, writes Andrew Michael.

The technology-heavy Nasdaq index gained 2.5% on the news.

Today’s figures from the US Bureau of Labor Statistics show the consumer prices index rising by 8.5% in the year to July 2022, down from 9.1% – a 40-year high – a month earlier.

In a dip that exceeded forecasts, the Bureau said the weaker reading was driven by a fall in fuel prices, with its energy index falling by 4.6% month-on-month to July.

Consumer prices in the UK rose by 9.4% in the year to June 2022, with the Bank of England warning recently that the inflation figure could reach 13% by the end of the year. The Office for National Statistics will reveal the latest figures next week.

The latest numbers from the US will assuage concerns among investors that the country’s central bank, the Federal Reserve, will continue its policy of aggressive interest rate hikes at its next policy meeting in September.

Last month, the Fed raised its target benchmark interest rate by 0.75 percentage points, to a range between 2.25% and 2.5%, the second rate hike of this magnitude in successive months.

Rob Clarry, investment strategist at wealth manager Evelyn Partners, said: “The key question that markets have been grappling with over the last month is whether the Fed will deviate from its current tightening plans. Falling commodity prices, deteriorating consumer confidence, and slowing growth could tempt the Fed to take its foot off the gas in upcoming meetings.”

5 August: Recession To Hit UK By Last Quarter Of The Year

The UK is on the brink of recession the Bank of England has warned, as it raised interest rates by 0.5 percentage points yesterday. The hike in Bank rate from 1.25% to 1.75% marked the biggest increase for the past 27 years.

The Bank also forecast that the economy will begin to shrink in the last quarter of the year – between October and December – and continue contracting until the end of 2023.

It would mark the deepest recession since the ‘credit crunch’ of 2008.

A recession is universally defined by two consecutive quarters of negative growth in GDP or Gross Domestic Product – a measure of a country’s economic output.  During a recession, the economy struggles, people lose their jobs, companies make fewer sales and the country’s overall economic output declines.

The Bank also revised its inflation forecasts to more than 13% by the end of the year – up from a current 9.4% – as even higher energy prices hit households from October when the regulator’s new price cap takes effect.

Soaring energy bills have been largely driven by Russia’s invasion of Ukraine, which is also impacting high petrol and diesel costs, as well as food prices.

In the wake of another round of interest rate hikes – the sixth in seven months – the cost of mortgages will also rise further. Two million mortgaged homeowners will be immediately impacted, with millions more to follow when they come to remortgage or buy their first home. 

However the Bank said that rate rises were necessary to tame soaring inflation, and to ‘do its job’ of bringing it back down to its 2% target.

It explained: “The main way we can bring inflation down is to increase interest rates. Higher interest rates make it more expensive for people to borrow money and encourage them to save. 

“That means that, overall, they will tend to spend less. If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.”

News of an imminent recession will come as a further blow to the swathes of households already struggling under mounting cost of living pressures.  

Laith Khalaf, head of investment analysis at AJ Bell commented: “Winter is coming, and it’s shaping up to be an absolute horror show for the UK economy. Make no mistake, 0.5% is a historic interest rate rise, but it is overshadowed by the abysmal economic forecasts produced by the Bank of England.”

He added: “Inflation is now forecast to hit 13% at the back end of this year, when the UK is also expected to enter into recession, just in time for Christmas.”

However, Fraser Harker, Investment Analyst at 7IM, urged people to ‘look beyond the headlines’. He said: “The word recession means different things to different people. It’s perfectly possible that by the end of the year, the UK will have exhibited two consecutive quarters of falling GDP. 

“However, this doesn’t necessarily have to be accompanied by the things that most people associate with a recession – such as widespread rises in unemployment and significant drops in house prices.”

4 August: Bank Rate Jumps By Half A Percentage Point As Bank Wages War On Inflation

The Bank of England (BoE) today raised its Bank rate from 1.25% to 1.75% – the highest level in 14 years – in a widely anticipated move aimed at heading off soaring UK inflation, writes Andrew Michael.

Latest data showed that UK inflation, as measured by the consumer prices index, had risen to a 40-year high of 9.4% in the year to June 2022.

But, explaining its decision behind today’s rate hike, the BoE warned that a recent surge in gas prices meant inflation could now rise above 13% by the end of the year – far higher than its May forecast.

The BoE also predicted that inflation could remain at “very elevated levels” throughout the course of next year.

The 50-basis point increase, announced by the BoE’s rate-setting Monetary Policy Committee (MPC), is the bank’s first rate-hike of this magnitude in 27 years and the first since the committee was created 25 years ago.

Members of the MPC voted overwhelmingly for the half-percentage point increase with eight votes in favour, compared with one against.

The increase to the Bank rate, the sixth announced by the BoE since December 2021, will have an almost immediate financial impact on around two million UK households on variable rate mortgages, including tracker deals.

For example, borrowers with a £200,000 mortgage currently priced at a variable rate of 3.5% can expect to see their monthly bill rise by around an extra £60.

The BoE’s announcement follows last week’s decision by the Federal Reserve, the US central bank, to raise its target benchmark interest rate by 0.75 percentage points to a range between 2.25% and 2.5%.

Inflation in the US currently stands at 9.1%. Both the BoE and the Fed each have inflation targets of 2%.

Alice Haine, personal finance analyst at investing service Bestinvest, said: “While it is unusual for a central bank to raise rates when the economy is in danger of falling into a recession, the country is in the grip of a cost-of-living crisis as global challenges such as Ukraine’s war with Russia drive up food and fuel prices to dizzying highs.”

Haine added: “The latest interest rate rise will also eat into the Government’s package of handouts to support struggling households. Up to eight million vulnerable households are in line to receive £1,200 in Government aid this year to help them cope with the huge financial hit delivered by the cost-of-living crisis, including the £326 support payment issued last month.”

Les Cameron, financial expert at M&G Wealth, said: “Staring down the barrel of potential double-digit inflation means reviewing your finances and ensuring your savings can weather future challenges is now more important than ever.”

The result of the BoE’s next rate-setting meeting will be announced on 15 September 2022.

27 July: Federal Reserve Hikes Rate In Battle Against Inflation

The United States Federal Reserve today raised its target benchmark interest rate by 0.75 percentage points to a range between 2.25% to 2.5%.

It implemented a same-sized increase in June from a base of 1% (see story below).

The scale and pace of the increases is seen by economists as an indication of the growing sense of urgency at the US central bank as it battles inflation standing at 9.1%, the highest it has been since the beginning of the 1980s.

The three main US market indices all responded positively to the move. The Dow Jones Industrial Index rose by over 530 points to 32,291 while the S&P 500 rose by almost 3% to 4,037. The NASDAQ index of tech stocks increased by over 4% to top 12,000.

In the UK, the main Bank interest rate stands at 1.25% – it was increased from 1% in June – while inflation is running at 9.4%. The Bank of England is widely expected to increase the Bank rate to 1.75% when the next rate announcement is made on 4 August.

21 July: Eurozone Hikes Interest Rates For First Time Since 2011

The European Central Bank (ECB) today announced an increase in interest rates for the first time in over a decade in a larger-than-expected move designed to fight inflation across the Eurozone. The rise will take effect from 27 July.

The ECB’s governing council said the base rate across the 19-member currency bloc will rise by 0.5%, from minus 0.5% to zero. The 50-basis point hike, double the amount mooted last month, is the largest imposed by the central bank since 2000.

It also hinted at further interest rate rises at future meetings, although it gave no guidance on the size of those increases.

Today’s move brings Eurozone monetary policy more into line with that of both the Bank of England and the US Federal Reserve, which have each raised interest rates multiple times this year.

A rate set at zero means that neither borrowers nor institutions benefit from money being held on deposit.

Critics accused the ECB of being asleep at the wheel after inflation soared to 8.6% across the Eurozone – more than four times the central bank’s target of 2%.

The latest inflation surge has largely been driven by the economic impact of the war in Ukraine coupled with soaring energy prices.

Today’s announcement from the ECB came in the wake of the earlier resignation of Italian Prime Minister, Mario Draghi, terminating a national unity government that had been created to tackle unpopular reforms in the country.

Garry White, chief investment commentator at wealth manager Charles Stanley, said: “The ECB hawks are sounding tough right now, but they may have to temper their talk and guidance to face up to the realities of weak government finances in the periphery, and the fact a slowdown is already underway.

“To top it off, the ECB will now also be worried about political problems in Italy. For voting members of the ECB, inflation is not their only preoccupation, unlike the other western central banks.”

20 July: Pressure Ramps Up On Bank Of England To Tackle Rising Prices

UK inflation rose to a 40-year high of 9.4% in the year to June 2022, according to the latest figures from the Office for National Statistics (ONS).

The increase was slightly ahead of the 9.3% predicted by economists. On a monthly basis, the Consumer Prices Index (CPI) increased by 0.8% in June 2022, compared with a rise of 0.5% in June 2021.

The news will heap added pressure on household finances already stretched to breaking point as consumers grapple with the worst cost-of-living crisis in years.

The ONS said rising prices for fuel and food were the main contributors to the latest CPI figure edging higher, outweighing downward forces coming from the second-hand car market and audio-visual equipment.

Grant Fitzner, ONS chief economist, said: “Annual inflation again rose to stand at its highest rate for over 40 years. The increase was driven by rising fuel and food prices.

“The cost of both raw materials and goods leaving factories continued to rise, driven higher by higher metal and food prices respectively.”

In recent months the UK, along with many countries around the world, has felt the brunt of inflationary economic headwinds thanks to surging energy prices, a squeeze in the post-pandemic global supply chain, and the ongoing war in Ukraine.

UK inflation now teeters at nearly five times the 2% target set for the Bank of England (BoE) by the government. The BoE has forecast that inflation will peak at around 11% later this year before levels start to fall during 2023.

Addressing the City of London’s annual Mansion House dinner yesterday, Andrew Bailey, the BoE governor, raised the possibility of increasing interest rates by half a percentage point in early August as he toughened the central bank’s language on tackling rising prices.

The BoE has already raised the bank rate five times, to its present level of 1.25%, since December 2021. A half-percentage point increase would be the largest hike in the bank rate since 1995.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Another month and another rise in inflation as the relentless pressure on consumers continues. This time the UK consumer prices index came in at 9.4%, a touch higher than forecasted as continued high energy and petrol prices take effect.

“The Bank of England will be feeling the heat of the past few days and has a very difficult job on its hands to ensure the economy has a soft landing. Recession fears are growing by the day and if more extreme interest rate rises are required, this could easily tip the economy into contraction.”

Matt Roche, Associate Investment Director at Killik & Co, said: “With inflation expected to reach 11% by autumn, the purchasing power of savings in bank accounts is being rapidly eroded. In this environment, savers should look at investing as a means of inflation proofing their money.

“While it is advisable to keep a cash buffer for emergencies and plan major outlays well in advance, surplus monies can be made to work harder. For example, a stocks & shares individual savings account can provide excellent tax efficient long-term returns. With share prices having generally fallen in 2022, global stock markets now look that much more appealing for lifetime savers.”

14 July: Pressure Mounts On Federal Reserve To Tackle Rising Prices

US inflation accelerated to a new 40-year high in the year to June 2022, according to the latest figures from the US Bureau of Labor Statistics (BLS), writes Andrew Michael.

In a jump that outpaced even the most aggressive forecasts, the BLS reported on Wednesday (13 July) that consumer prices rose to 9.1% last month, putting the annual inflation rate at its highest level since November 1981. Inflation in the UK also stands at 9.1%.

The BLS said prices rose across most goods and services leaving Americans having to dig deeper to pay for fuel, food, healthcare and rent.

Strong inflationary headwinds are now a regular feature of the global economic environment.

Consumer prices are feeling the effect of soaring energy prices and the conflict in Ukraine, as well as suffering from a global supply chain problem as the world emerges from the Covid-19 pandemic.

The latest inflation figure from the BLS has put the Federal Reserve, the US central bank, under pressure to abandon its monetary policy guidance for the second month in a row and raise interest rates by a full percentage point at the end of this month.

In June, the Fed increased its interest rates ceiling from 1% to 1.75%. The last time a 0.75% percentage point hike had been imposed prior to this was in 1994.

The Fed, in line with other central banks around the world such as the Bank of England in the UK, has an inflation target of 2%.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “US consumer prices have breached 9%, hitting 9.1% in the year to June. We now have to question just how close we are to the peak.

“A 0.75% hike from the Federal Reserve at its next meeting is an absolute certainty and there may even be pressure from some quarters for it to do more. Central banks are clearly struggling to get a handle on inflation and if this number continues to grow or hover around this level, then more will be required to drive it down, regardless of the economic consequences this may have.”

[] In a surprise move, the Bank of Canada raised its key interest rate on Wednesday (13 July) by one percentage point to 2.5% in a bid to head off inflation that policymakers warned was at risk at becoming entrenched.

6 July: National Insurance Contributions Threshold Uplift Lands Today

Millions of pay packets will receive a boost from Wednesday 6 July when the threshold at which National Insurance contributions (NICs) become payable rises from £9,880 to £12,570, writes Andrew Michael.

The change was announced in the Spring Statement in March. 

NICs increased as planned at the start of this financial year on 6 April to help fund the government’s Covid response, but the scheduled move attracted criticism in the early months of this year, with critics slamming it as another cost burden on households facing a worsening cost-of-living crisis.

This prompted Rishi Sunak MP, Chancellor of the Exchequer at the time, to engineer the upcoming threshold increase.

NICs, a tax on earnings and self-employed profits, are the UK government’s second-largest source of tax revenue after income tax. Payment of NICs is important because it provides individuals with the right to receive certain social security benefits, including the state pension.

The 6 July change means people categorised by HM Revenue & Customs for tax purposes as Class 1 (employed) or Class 4 (self-employed) are able to earn an extra £2,690 before paying anything to NI.

Interactive Investor (ii), the investment platform, estimates that the uplift in the NI threshold will benefit 30 million people, saving a typical worker around £330 a year. The move also means that around 2.2 million people will be lifted out of paying NI entirely.

However, ii pointed out that the effect of fiscal drag means that UK taxpayers are set to pay as much as £16,000 more in tax on their income by the end of 2026, when a series of tax-free allowances and thresholds are set to be lifted.

Fiscal drag arises when inflation or earning growth pushes taxpayers into a higher rate tax bracket.

Last year, the Chancellor froze the basic and higher rate income tax thresholds from 2022 to 2026. At a time of increasing average wages, the move will suck an increasing number of people into the higher rate tax bracket.

According to ii, by 2026 a basic rate taxpayer earning £30,000 will see their take home pay reduced by £1,816 in real terms due to the personal tax allowance and the NI threshold not keeping pace with inflation.

The company added that higher rate taxpayers would experience an even bigger impact on their earnings. It calculated that someone earning £50,000 will have £4,271 less in their pocket in real terms by 2026, while a top earner with an income of £150,000 will pay an extra £15,596 in tax.

II’s calculation took into account the recent 1.25 percentage points increase to NI imposed by the Treasury to support the NHS, as well as the increase to the NI starting threshold.

Alice Guy, personal finance expert at ii, says: “The Chancellor is carrying out a secret £3,631 tax raid on millions of struggling families. It will push many families to the brink as they cope with a crushing tax burden on top of the existing cost-of-living crisis.”

22 June: UK Inflation Hits 9.1% As Food Prices Soar

UK inflation edged up to 9.1% in the year to May 2022 – its highest level since 1982 – according to the latest figures from the Office for National Statistics (ONS).

The news will add extra pressure to already stretched household finances, as consumers grapple with the worst cost-of-living crisis in years.

On a monthly basis, the Consumer Prices Index (CPI) increased by 0.7% in May this year, compared with a rise of 0.6% in May 2021.

The ONS said that rising prices for both food and non-alcoholic drinks – compared with falls for both a year ago – were the main contributors to the latest CPI figure edging higher.

In recent months the UK, along with many countries around the world, has felt the brunt of inflationary economic headwinds thanks to surging energy prices, a global post-pandemic supply chain bottleneck, and the ongoing conflict in Ukraine.

UK inflation is now nearly five times the 2% target set for the Bank of England (BoE) by the government. Last week, the BoE raised the Bank Rate to 1.25% in its latest bid to tackle the inflation figure.

At the same time, the UK’s central bank warned that inflation could reach 11% later this year. Energy costs are set to soar in October in line with an anticipated rise in the energy price cap, announced by Ofgem, the energy regulator.

Grant Fitzner, ONS chief economist, said: “The price of goods leaving factories rose at their fastest rate in 45 years driven by widespread food price rises, while the cost of raw materials leapt at their fastest rate on record.”

Alice Haine, personal finance analyst at Bestinvest, said: “People’s spending power is now severely hampered and households need to do some serious financial stock-taking if they want to continue to afford the level of lifestyle they have become accustomed to.”

Haine added: “With prices heading ever higher, slashing budgets now to reduce spending is vital for those that want to ride out the year with their bank balance still in the black, as runaway inflation means your salary simply does not stretch as far.”

Paul Craig, portfolio manager at Quilter Investors, said: “While the rate of growth in the inflation rate may have slowed, we have plenty warnings that this is not the peak. Disappointingly, the cost-of-living crisis is not going to be a short-lived affair, and this ultimately leaves the BoE stuck between a rock and a hard place.”

“While the US has acknowledged the need to go hard and fast on interest rates, the BoE continues to plod along at a slower pace, trying not to tip the economy into recession at a time when businesses and consumers are feeling the pinch.”

“However, their current strategy is doing little to stop inflation running away from it and thus harder decisions are coming very soon with the Bank already hinting at a larger rise at its next meeting.”

16 June: Interest Rate Hits 1.25% As Bank Wages War On Inflation

The Bank of England (BoE) today raised its Bank rate from 1% to 1.25%, in an attempt to stave off runaway UK inflation.

Latest data showed that consumer prices jumped by 9% in the year to April 2022, the highest level amongst the G7 group of leading world economies.

Today’s 0.25 percentage point hike was widely predicted by City forecasters. The last time the Bank Rate exceeded 1% was in 2009 when Gordon Brown was Prime Minister and the world economy was emerging from the global financial crisis.

The increase is the BoE’s fifth rate rise since December last year and followed yesterday’s decision by the US Federal Reserve to raise its interest rates ceiling by 75 basis points to 1.75% (see story below).

According to the BoE, its rate-setting Monetary Policy Committee votedby six to three in favour of a rate rise.

Today’s announcement is the latest in a series of attempts by central banks around the world to tackle the inflationary headwinds being felt in many countries. US inflation stands at 8.6%. Both the BoE and the Fed have inflation targets of 2%.

A rise in the UK bank rate can prove costly to households – already reeling from a squeeze in the cost-of-living – that have either variable rate or tracker mortgages. This is because lenders tend to increase the repayments required on home loans to reflect higher borrowing costs.

In contrast, UK savers will benefit from the rate hike if they have money deposited in variable-rate paying accounts, assuming providers decide to pass on either all, or part, of a rate rise to customers.

The new Bank Rate announcement is on 4 August, when another rise is on the cards, perhaps of the same magnitude, although a rise of 50 basis points to 1.75% cannot be ruled out.

15 June: Federal Reserve Raises US Interest Rates, Bank Of England Announcement Imminent

The United States Federal Reserve has increased its interest rates ceiling from 1% to 1.75% today in a bid to tackle the country’s highest inflation rate in 40 years.

The 0.75 percentage point hike in the Fed’s benchmark rate had been widely anticipated by commentators in recent days. The Fed last imposed a rate increase of this magnitude in 1994.

US inflation currently stands at 8.6%. Today’s rate hike is a sign from the Fed of an increasingly aggressive stance towards monetary tightening in a bid to tackling soaring consumer prices.

The latest increase follows a half-percentage point hike in interest rates announced last month.

The Fed said: “Inflation remains elevated, reflecting supply and demand imbalances relating to the pandemic, higher energy prices and broader price pressures.

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

Central banks in multiple bids to control inflation

Today’s announcement by the Fed is the latest in a series of attempts by the world’s central banks to tackle inflationary headwinds being felt in many countries.

Global inflationary pressures are being exacerbated by multiple factors including soaring energy prices, post-pandemic worldwide supply chain bottlenecks, and the war in Ukraine.

Both the Fed and the Bank of England (BoE), the UK’s central bank equivalent, have inflation targets of 2%. The UK inflation rate currently stands at 9%.

Tomorrow (Thursday), the BoE is widely being tipped to announce a 0.25 percentage point increase to the UK bank rate. The rate currently stands at 1% following four rate hikes since December last year.

Should the BoE’s Monetary Policy Committee decide to increase rates, the move will prove costly to households with variable rate and tracker mortgages as lenders tend to increase repayments to reflect their own higher borrowing costs.

Savers, in contrast, would benefit from any further hikes if they have money deposited in variable rate-paying accounts, assuming their provider decided to pass on any rise to its customers.

In the UK, steepling inflation is partly responsible for a cost-of-living crisis that has squeezed the incomes for households that have been left poorer following a raft of tax increases that came into effect in April 2022.

Laith Khalaf, head of investment analysis at online broker AJ Bell, said: “The global economy might be slowing, but central banks across the developed world are facing an existential question of credibility. If they fail to act in the face of such rampant inflation, they undermine their very raison d’être, but by hiking rates aggressively, they put pressure on economic activity.”

13 June: Worries Mount Over Rising Living Costs

More than three-quarters of UK adults feel either ‘very’ or ‘somewhat’ worried about the rising costs of living, according to the results of a May survey carried out by the Bank of England and Ipsos which explores attitudes to inflation.

Groups most likely to feel ‘very or somewhat worried’ include women, people aged between 30 to 49 years, disabled people, and those living with a dependent child aged 0 to 4 years.

While levels of worry generally transcended income brackets, those earning less than £10,000 a year accounted for the largest proportion of being ‘very worried’ (31%), compared to only 12% of those with annual salaries of £50,000 or more.

Half of all adults (50%) who reported they were ‘very worried’ about the rising cost of living, thought about it on a daily basis, according to the survey.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, said: “It’s difficult enough to cover our costs right now, but what makes matters worse, is that prices are going to keep rising from here. Inflation is expected to remain higher for the rest of the year, and peak at the end of 2022. It means that even those who are coping now  may well start struggling later.

The report coincided with US inflation figures which revealed that consumer prices climbed to 8.6% in the year to May, according to the US Bureau of Labor Statistics (BLS), marking a new 40-year high.

The UK’s consumer price index (CPI) measure of inflation currently stands at 9% in the year to April, with May’s figures to be announced on 22 June. 

Separate figures released today by the Office For National Statistics, showed that the UK’s economy as measured by its GDP (Gross Domestic Product) shrank in April by 0.3%, due to services, production and construction sectors all retracting. It marks the second consecutive month that the economy has shrunk, having retracted by 0.1% in March, and is fuelling fears of a recession.

The relentlessly-increasing cost of living is applying further pressure on the Bank of England to increase interest rates when the next decision is announced this Thursday (16 June), further impacting the cost of mortgages.

10 June: US Inflation Soars To 40-Year High

US inflation hit a new 40-year high in the year to May 2022, according to the latest figures from the US Bureau of Labor Statistics (BLS).

The BLS reported that consumer prices rose to 8.6% last month, an increase of 0.3 percentage points on the 8.3% reported in the year to April 2022, putting them at their highest level since December 1981. The bureau said that the main contributors to the latest inflation figure included ‘shelter’ (housing), food and fuel.

Strong inflationary headwinds have become a mainstay of the global economic environment over the past nine months. Consumer prices are not only feeling the effect of soaring energy prices and the ongoing conflict in Ukraine, but are also suffering from a global supply chain problem as the world emerges from the effects of the Covid-19 pandemic.

The US figure, which exceeded market expectations of 8.3%, will make uneasy reading for the US Federal Reserve which meets next week to decide its next move on interest rates. The Fed, in line with other central banks around the world such as the Bank of England in the UK, has an inflation target of 2%.

In May, the Fed raised its headline funds rate by half of a percentage point to 1%, its first 50-basis point hike in more than 20 years. Today’s inflation figure may prompt a further rate rise of a similar magnitude next week.

The Fed has already committed to imposing monetary policy “expeditiously” to a more “neutral” level that no longer stimulates the economy. But additional evidence that inflation is becoming more entrenched could force officials to hike rates even more forcefully than financial markets expect.

Dan Boardman-Weston, ceo of BRI Wealth Management, said: “The Fed has a tricky task ahead of it trying to ensure that inflation expectations don’t become entrenched, but they are likely to continue tightening policy into a slowing economy. The ‘softish’ landing they are hoping for continues to look like a big ask.”

10 June: Eurozone Faces First Interest Rate Rise Since 2011

The European Central Bank (ECB) says it will raise interest rates this summer, the first increase of its kind for 11 years, after warning that inflation would increase by more than previously estimated.

The ECB’s governing council announced that the base rate for the 19-member currency bloc would be raised by 0.25% in July, with the potential for a further – and possibly larger – hike already pencilled in for September.

July’s increase will lift the main deposit rate for commercial banks up from its current level of -0.5%. A negative interest rate effectively means that borrowers are paying institutions for the privilege of having their money sitting on deposit.

Critics have accused the ECB of being asleep at the wheel after inflation soared to 8.1% across the Eurozone – more than four times the central bank’s 2% target.

The latest inflation surge has largely been driven by sparing energy prices, coupled with the economic impact from the war in Ukraine.

The ECB’s announcement will bring Eurozone monetary policy more into line with the Bank of England and the US Federal Reserve which have raised interest rates multiple times this year.

Christine Lagarde, the ECB president, said that: “It is good practice to start with an incremental increase that is not… excessive.”

Ms Lagarde added there was a risk that food and energy price inflation will stay high for some time, and also that businesses’ capacity could take a permanent hit which also had the potential to damage Eurozone economies for a prolonged period.

Assuming the ECB’s rate hike goes ahead, the central banks of Japan and Switzerland would be the last two major monetary authorities worldwide that were still applying negative rates.

Hinesh Patel, portfolio manager at Quilter Investors, said: “The ECB has previously been well behind the curve when it comes to tightening policy, and to some extent it is holding fast still, though this finally looks to be coming to an end.

“For now, the balancing act faced by the ECB continues to be a tricky one. The bloc is faced with inflationary shock that requires quick and decisive action, yet Russia’s ongoing attack on Ukraine continues to cast a shadow of uncertainty over Europe that could end with weak demand and recession.”

30 May 2022: Cheapest Groceries Inflation Matching General Prices Rises 

Research by the Office for National Statistics (ONS) has found the average price of a basket of low-cost food items has risen at a lower rate than the official Consumer Prices Index (CPI) – but broadly in line with more general food and drink costs.

The ONS found the cost of budget grocery items rose between 6% and 7% in the 12 months to April. This compares to an inflation rate of 6.7% for more general ‘food and non-alcoholic beverages’ that were tracked over the same period.

While both measures are less than the headline annual rate of inflation (9% to April), it found stark price differences between individual budget food products.

For example, the cost of pasta has risen by 50% since April 2021, while the average price of potatoes has actually fallen by 14%. Rice, beef, bread and crisps are up by 15% – 17% while cheese, sausages, pizza and chips were down by up to 7%.

The ONS also took into account ‘shrinkflation’ — the process of reducing product sizes while retaining their previous price.

The ONS compiled prices for 30 everyday food and non-alcoholic drink items — including pasta, potatoes, vegetable oil, chicken and fruit squash — comparing prices between seven UK supermarket websites to report the cheapest available version of each product.

This experimental research aims to establish how the cheapest everyday consumer goods are being impacted by inflation in the UK, since the official consumer price index is influenced by more expensive purchases such as clothing and footwear, entertainment, and restaurants.

Fears of a global wheat shortage are likely to trigger further price increases for staples such as pasta and bread. 

The Russian invasion of Ukraine, which produced a quarter of the world’s wheat exports prior to the conflict, has disrupted export routes via the Black Sea.

18 May: Inflation Rockets To 9%

• Consumer Prices Index (CPI) measure of inflation rose by 9.0% in the 12 months to April 2022, up from 7.0% in March
• CPI rose by 2.5% in April 2022, compared with a rise of 0.6% in April 2021

UK inflation rocketed to 9% in April 2022 – up from 7% the previous month – taking the figure to its highest level in 40 years, as consumer prices felt the effect of soaring energy costs and impact of the ongoing conflict in Ukraine.

The latest increase, announced by the Office for National Statistics (ONS), will exacerbate the cost-of-living crisis facing millions of UK households as prices gnaw away at the buying power of people’s incomes.

Today’s inflation increase arrives as many workers are seeing their wages fall sharply in real terms. Average salaries, excluding bonuses, rose 4.2% in the three months to March 2022, according to ONS data – an increase that was largely gobbled up by the surging cost of living.

Recent figures from the National Institute of Economic and Social Research (NIESR) predict a worsening situation with real disposable income dropping 2.4% this year. This would cause an extra 250,000 households to fall into destitution by 2023, taking total UK numbers falling into the category of extreme poverty to 1 million.

‘Destitution’ is defined as where a family of four has £140 a week or less to live on after housing costs. 

NIESR has also warned that rising prices and higher taxes are squeezing household budgets across the economic divide. It estimates that an additional 1.5 million households across the UK are facing food and energy bills greater than their disposable income.

Consumer detriment

The latest inflation surge is being driven by soaring energy and fuel prices, coupled with the economic impact from the war in Ukraine.

These are factors outside the control of the Bank of England (BoE), which sets interest rates, meaning stretched consumers have little option but to cut back outgoings so they can live within their means.

Alice Haine, personal finance analyst at Bestinvest, said: “Taking constructive action to reduce spending now is imperative as the outlook darkens from here. 

“Slashing household budgets is the best strategy, but it can only go so far if people have already trimmed out all the luxuries such as eating out, holidays and clothes shopping.

“Once households find themselves struggling to pay for the essentials, such as mortgages or rents, food and household bills, they run the risk of building up debt on overdrafts and credit cards they cannot afford to repay.”

The effect of inflation on your finances depends on your individual spending habits. Your personal financial situation may be impacted more – or less – than the headline rate of 9%.

This is because the ONS – which records consumer prices data – calculates its figures from a virtual basket of 700 items made up of everyday items such as milk and bread, to bigger ticket items such as air travel costs or the price of a new car.

Impact on savers

Savers with cash sitting in deposit accounts should take a little comfort from the BoE’s recent spate of four interest rate rises in the past six months. The latest quarter-point hike took the Bank rate to 1%, its highest level since 2009.

In tandem with these moves, savings rates have edged up slowly with easy-access accounts now paying 1% or above and the top, fixed-rate products around or above the 2% mark.

Banks and building societies, however, are traditionally glacially slow at passing on the good news from upwards rate rises to savers. What’s more, even with interest rates on the rise, their effect is eclipsed by the current sky-high inflation level – all of which delivers a negative real rate of return on savings.

The best advice for savers in this situation is to shop around for the best rates to ensure their cash is working for them as hard as it possibly can.

Sarah Coles of Hargreaves Lansdown said: “For the four in five savers who have left their money languishing in easy access accounts with the high street banks – paying 0.1% or less – now is the time to move.

“The high street giants have passed on an insultingly small fraction of the rate rise to savers, so there’s no point holding on just in case they suddenly decide to do the decent thing”. 

Coles adds that if you have savings you won’t need for five years or longer, it’s worth considering whether any extra money could be working harder for you in investments: “These will rise and fall in value over the short term, but over 5-10 years or more they stand a much better chance of beating inflation than cash savings,” she points out.

What comes next?

Unlike the US, which recently witnessed a small reversal in its inflation figure (see story below), UK inflation continues to rise for the time being, stoking further fears around cost-of-living issues heading through 2022 and into next year. 

The Bank of England has suggested inflation could peak at 10% later this year when the energy price cap is increased in October.

Richard Carter, head of fixed interest research at Quilter Cheviot says: “This will add to the pressure on the BoE to increase interest rates and get to grips with soaring prices even if, as they admit themselves, many of the factors driving inflation are beyond their control.

“We should not be surprised to see further pressure mount on the government soon to pull some fiscal levers and look to alleviate the pain on households this autumn.”

Another option would be for the government to impose a one-off levy on oil and gas producing companies, which have seen their profits soar thanks to runaway price of gas in the past year.

Earlier this week, Rishi Sunak, the Chancellor of the Exchequer, stepped up warnings to the oil and gas industry that, unless companies soon announced increased investment plans for the UK, they could face a potential windfall tax on their profits.

Impact on incomes

Debbie Kennedy at broker LifeSearch says the majority of Brits are worried about their finances: “Our research found that seven in 10 (72%) of all Brits expect to be worse-off financially this year as inflation soars, anticipating to be £3,020 per year out-of-pocket on average.

“Overall, just 8% of respondents said they don’t think they’ll be worse off financially as a result of inflation.

“The rising cost of living is having a detrimental effect on our mental health too. Three-quarters (74%) of adults say their mental health has been negatively impacted in the last two years and of these, the ‘rising cost of living’ (28%), closely followed by ‘Covid restrictions’ (27%), were the top causes.” 

11 May: US Inflation Stays Elevated At Near 40-Year High

US inflation showed a slight deceleration in April, though prices continued to grow close to a 40-year high, according to the latest figures from the US Bureau of Labor Statistics (BLS).

The BLS reported that consumer prices dipped slightly to 8.3% in April, still stubbornly high, but down from the previous month’s figure of 8.5%. Economists had predicted a bigger easing in the inflation rate to 8.1%.

Data showed that prices rose by an extra 0.3% in April, slower than the 1.2% recorded in March. The BLS says the main contributors to the latest inflation figure include shelter, food, airline fares and new vehicles.

Commentators suggest the latest inflation figure will keep up the pressure on the US Federal Reserve, the country’s central bank, to carry on with a programme of half-percentage point interest rate rises through the course of 2022.

The Fed recently increased its interest rates ceiling from 0.5% to 1% and did not rule out similar moves during the remainder of this year. 

In recent weeks, other central banks including the Bank of England, Reserve Bank of India and Reserve Bank of Australia have each increased interest rates in a bid to tackle the inflationary headwinds being felt in many countries worldwide.

The drop in US CPI may be welcomed by markets with investors starting to hope that peak inflation has now passed. 

However, the numbers were still worse than expected and commentators believe it is too early to celebrate with inflation likely to remain high for some time to come, exacerbated by an ongoing crisis in the energy market and the continued conflict in Ukraine.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The pressure is still very much on the Fed to raise interest rates and get inflation under control. Nevertheless, attention is now beginning to turn to a sharp slowdown that is predicted for the global economy, and markets are increasingly becoming concerned by this.”

Dan Boardman-Weston, CEO of BRI Wealth Management, said: “The Fed has a tricky task ahead of it trying to ensure that inflation expectations don’t become entrenched. They are likely to continue tightening policy into a slowing economy. The ‘softish’ landing it is hoping for may not be so soft.”

The next announcement on UK inflation rates is due from the Office for National Statistics on 18 May.

5 May: Bank of England Hikes Interest Rate To 1%

The Bank of England (BoE) today raised its Bank rate of interest from 0.75% to 1%, in a bid to counter the UK’s soaring inflation rate.

UK inflation stands at 7%, and the 25-basis point hike was widely predicted by City forecasters. UK interest rates last stood at 1% in the early part of 2009.  

The move, the BoE’s fourth rate rise since December last year, followed yesterday’s decision by the US Federal Reserve to raise its interest rates ceiling by 50 basis points to 1%.

Today’s announcement by the BoE is the latest in a series of attempts by central banks around the world to tackle the inflationary headwinds being felt in many countries. US inflation stands at 8.5%. Both the BoE and the Fed have inflation targets of 2%.

Earlier this week, the Reserve Bank of India and Reserve Bank of Australia both announced interest rate hikes. The first rise in a decade in the case of the latter.

A rise in the UK bank rate can prove costly to households with either variable rate or tracker mortgages. This is because lenders tend to increase the repayments required on home loans to reflect higher borrowing costs.

In contrast, UK savers will benefit from the rate hike if they have money deposited in variable-rate paying accounts, assuming providers decide to pass on either all, or part, of a rate rise to customers.

Laura Suter, head of personal finance at AJ Bell, said: “Today’s move by BoE rate setters lumps even more pain on households struggling with the cost of living crisis. The global nature of the drivers of inflation means that this increase to 1% is very unlikely to beat inflation into a hasty retreat, but what it is certain to do is pile more misery on people already having to rely on debt just to pay their bills.”

The next Bank rate announcement will be on 16 June.

4 May: US Raises Interest Rates, Bank Of England Decision Imminent 

The United States Federal Reserve has increased its interest rates ceiling from 0.5% to 1% today in a bid to counter the country’s highest inflation rate in 40 years.

Inflation in the US currently stands at 8.5%, and the 50 basis point hike in the Fed’s benchmark rate – the largest change to its main policy rate since 2000 – was widely anticipated by commentators. The increase follows on from a quarter point hike in interest rates announced by the Fed in March.

As part of its two-day policy meeting that concluded today, the Federal Open Market Committee voted to raise the target range of the federal funds rate to between 0.75% and 1%.

In a statement, the Fed said that it expected “ongoing increases in the target range will be appropriate”, paving the way for possible additional half-percentage point rises later this year.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “This 50 basis point hike by the Federal Reserve is likely to be followed by several more, judging by the tone of the statement and the fact that the US economy continues to fire on all cylinders.

“Inflation is running at over 8%, while the latest employment report showed that there are almost two jobs available for every unemployed worker. These pressures won’t be going away anytime soon, and thus the Fed feels the need to act severely and fast.”

Central banks in multiple bids to control inflation

Today’s announcement by the Fed is the latest in a series of attempts by central banks around the world to tackle inflationary headwinds being felt in many countries.

Earlier today, the Reserve Bank of India announced a 40 basis points rise in its benchmark interest rate to 4.4%. On Tuesday this week, the Reserve Bank of Australia surprised economists by hiking its official rate by 25 basis points to 0.35%. The upwards move was the first of its kind in the country for a decade.

Global inflationary pressures are being exacerbated by the war in Ukraine. Inflation has also been driven by factors including soaring energy prices, as well as the reawakening of slumbering global economies post-pandemic.

Both the Fed and the Bank of England, the UK’s central bank equivalent, have inflation targets of 2%. The UK inflation rate currently stands at 7%.

Tomorrow (Thursday), the Bank is widely expected to announce an increase to the UK bank rate. This currently stands at 0.75% having already been subject to three rate rises since December last year.

If confirmed, a rise in the UK bank rate could prove costly to households with variable rate and tracker mortgages as lenders tend to increase repayments to reflect higher borrowing costs.

Savers, in contrast, would benefit from a hike if they have money deposited in variable-rate paying accounts where a provider decided to pass on any rate rise to its customers, in full or in part. 

In the UK, steepling inflation is partly responsible for a cost-of-living crisis that has squeezed the incomes for households that have been left poorer following a raft of tax increases that came into effect in April.

20 April: UK Car Production Plummets By 100k In First Quarter

The number of cars produced in the UK in the first quarter of 2022 fell by 99,211 year on year, from 306,558 to 207,347 – a drop of almost a third. The 2021 figure was already comparatively low due to the impact of the pandemic and associated lockdowns.

The Society of Motor Manufacturers & Traders (SMMT) attributes the current decline to a shortage of components – particularly semiconductors – and problems with the global supply chain. It also cited the high price of electricity as a pain-point for car-makers.

Output in March fell by more than a third, down by -33.4% year-on-year, with 76,900 units made compared with 115,498 in the same month last year. This decline resulted in the weakest March since the financial crisis in 2009, when 62,000 cars were built.

The SMMT is calling for the government to grant the car industry relief on energy costs in the same way as it is given to energy-intensive industries such as steel production. It also wants UK firms to be given access to low cost and low carbon energy on the same footing as its European competitors.

Mike Hawes, SMMT chief executive, said: “Two years after the start of the pandemic, automotive production is still suffering badly. Recovery has not yet begun and, with a backdrop of an increasingly difficult economic environment, including escalating energy costs, urgent action is needed to protect the competitiveness of UK manufacturing. 

“We want the UK to be at the forefront of the transition to electrified vehicles, not just as a market but as a manufacturer so action is urgently needed if we are to safeguard jobs and livelihoods.”

James Hind, CEO of car trading site carwow, said: “Demand for new cars is still strong and, in many cases, consumers are prepared to wait. We aren’t seeing the drop in consumer confidence impacting new car demand yet.

“However, many of those that aren’t prepared to wait are switching their interest to electric vehicles, which are less impacted by production issues – plus car manufacturers are prioritising EV production, meaning there are plenty of options to choose from.

“The other knock-on effect of course is to the second-hand car market. As motorists struggle to get hold of new models, many are turning to the second-hand car market, and as a results, demand is rising and so are prices.

“Anyone looking to switch their car might want to do it now. They could get a great price for their second hand petrol or diesel car – and potentially get an affordable, new EV much quicker than a new petrol or diesel vehicle.”

13 April: UK Inflation Rockets To 30-Year High

Inflation leapt to a new 30-year high in the year to March 2022, according to the latest figures from the Office for National Statistics (ONS).

Forced higher by surging fuel costs as a result of the conflict in Ukraine, the Consumer Price Index (CPI) rose at an annual rate of 7% in the 12 months to March, up from 6.2% in February.

The latest inflation figure sharply exceeded City expectations and came a day after consumer price inflation in the US surged to a 40-year high of 8.5% in the year to March 2022.

Rising prices put an extra squeeze on household finances already gripped in a cost-of-living crisis. Commentators warn UK inflation could rise further beyond 8% before starting to level off by the end of the year.

UK inflation in March was more than three times the 2% target set for the Bank of England (BoE) by the government. It was also substantially higher than the rate of “around 6%” that the BoE forecast at the time of its last bank rate-setting meeting in March.

The bank rate currently stands at 0.75%. Today’s inflation figure will add extra pressure on the BoE’s Monetary Policy Committee to raise interest rates once again on 5 May. The BoE has already raised the rate three times since December 2021.

Sharp increase

Grant Fitzner, ONS chief economist, said: “Broad-based prices saw annual inflation increase sharply again in March. Among the largest increases were petrol costs, with prices mostly collected before the recent (5p per litre) cut in fuel duty, and furniture.

“Restaurant and hotel prices also rose steeply in March while, after falling a year ago, there were rises across a number of different types of food.”

Paul Craig, portfolio manager at Quilter Investors, said: “Last month’s Spring Statement did little to quell the fears of those already feeling the squeeze financially, and the introduction of the new energy price cap and the national insurance increase has further increased the pressure. 

“With wages failing to keep up and pensions not rising by a similar amount, things are going to get tough for a lot of consumers.”

Martin Beck, chief economic advisor to the EY ITEM Club, said: “There will be another significant increase in inflation in the April data, when we expect the CPI rate to rise to at least 8.5%. This will be caused by the 54% rise in the energy price cap and the VAT rate for the hospitality sector being restored to 20%.

“That should represent the peak. But with the war in Ukraine potentially helping to keep food and oil prices elevated for a prolonged period, and another rise in the energy price cap on the cards for October, inflation will be slow to fall back. Over 2022 as a whole, we expect CPI inflation to average close to 7%.”

12 April: US Inflation Soars To 40-Year High

US consumer price growth surged by 8.5% in the year to March 2022, surpassing Wall Street’s expectations and propelling the country’s inflation rate to its highest figure in more than 40 years.

Today’s increase in the consumer price index, as reported by the US Bureau of Labor Statistics, was caused by rising costs for energy, food and accommodation as the impact of Russia’s invasion of Ukraine began to take effect.

Last month Joe Biden, the US President, banned all imports of oil and gas from Russia following the conflict in Ukraine, which started at the end of February.

Commentators suggested the latest figure will only pile extra pressure on the US Federal Reserve to accelerate the pace of the interest rate increases it announces in a bid to tame inflation.

Last month, the Fed raised interest rates from 0.25% to 0.5% – their first increase in four years. Along with other central banks, such as the Bank of England, the Fed has an inflation target of 2%. The next Fed rate-setting meeting is on 3-4 May.

UK inflation, as measured by consumer prices, currently stands at 6.2%, while the BoE bank rate is 0.75%. The BoE’s rate-setting Monetary Policy Committee is next due to meet at the beginning of May, with its decision released on 5 May.

Countries worldwide are facing severe inflationary headwinds at the current time. Retail inflation in India last month rose to a 17-month high of 6.95% from 6.07% in February 2022. Consumer prices in Turkey in the year to March 2022 hit 61%, a rise of seven percentage points on the previous month.  

Hinesh Patel, portfolio manager at Quilter Investors, said: “The Fed will feel emboldened today to press ahead with its aggressive hiking of interest rates as it looks to combat inflation. While used car prices and other non-essential items have begun to reach their price peak, the headline figures today illustrate how much of this is an energy-related shock.”

Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, said: “The Fed has a tricky task ahead of it and historically has struggled to battle inflation without lowering economic growth.”

29 March: Poorer Households “Facing 10% Inflation”

Typical household energy bills could rise to nearly £2,500 by autumn this year, according to an influential forecasting group.

The EY Item Club (EYIC) says the rise in energy and commodity prices in part caused by the Ukraine conflict will have a severe effect on households and drag back UK economic activity.

It says rising prices will add to UK inflation already at “significant” levels, predicting inflation will peak at a 40-year high of 8.5% next month and forecasting that prices will still be growing by 6% at the end of 2022.

EYIC is also warning that, while households across the economic spectrum have experienced similar levels of inflation of late, the 54% rise in typical home energy bills this April means lower-income households could experience an inflation rate of around 10%.

With further energy bill increases expected in October, EYIC says lower-income households are likely to experience persistently higher levels of inflation relative to their higher-income counterparts, well into 2023.

Martin Beck, chief economic adviser to the EYIC, said that, while the recent Spring Statement contained some help for households, a consumer squeeze is on the way: “Consumer spending is a key part of the UK economy, and the expectation has been that the passing of the worst of the pandemic would spur a corresponding consumer recovery. But the war in Ukraine and rising energy prices mean that outlook has dimmed.”

23 March: Inflation To Hit 8.7% Later This Year – OBR

• UK inflation forecast to peak at 8.7% this autumn
• Inflation to remain above 7% until 2023
• Household incomes predicted to fall by largest-ever amount

The Office for Budget Responsibility (OBR), the government’s fiscal watchdog, has predicted that UK inflation will peak at 8.7% later this year as rising prices are further exacerbated by the ongoing Russian invasion of Ukraine.

UK inflation as measured by the Consumer Price Index (CPI) jumped to a 30-year high of 6.2% in the year to February 2022. In recent months, rising inflation has been driven by soaring global prices for energy, petrol, food and durable goods.

In its report published alongside today’s Spring Statement, the OBR said it expected CPI inflation to peak at 8.7% in the fourth quarter of 2022. It also forecasted that UK inflation would remain above 7% in each quarter from the second quarter of 2022, until the first of quarter of 2023.

The OBR said it also expected rising inflation to be above earnings growth over the next year. It added that, despite the policy measures announced by Rishi Sunak, Chancellor of the Exchequer, in the Spring Statement, there would be a net increase in taxes across the economy starting from next month.

As a result, the OBR predicted that household post-tax incomes adjusted for inflation would fall during the tax year 2022/23 by 2.2%, their largest-ever drop since records began in the 1950s.

23 March: Inflation Hits 30-Year High Ahead Of Spring Statement

UK inflation soared to a new 30-year year high in the year to February 2022, according to the latest figures from the Office for National Statistics (ONS).

The figures will add pressure on Chancellor Rishi Sunak to announce extra financial support for households already facing a severe cost-of-living crisis when he delivers his Spring Statement at lunchtime.

The consumer price index (CPI) rose at an annual rate of 6.2% in the 12 months to February, up from 5.5% the previous month, its highest level since 1992. The figure overshot forecasts which had predicted a rise of 5.9%.

CPI increased by 0.8% in February 2022, the largest monthly rise between January and February since 2009.

In recent months, steepling inflation has been driven by soaring global prices for energy, petrol, food and durable goods. The ONS says the largest contributors to the latest increase in the monthly rate came from transport, household goods and furniture, while the cost of food and non-alcoholic drinks was also higher.

Today’s figures do not account for further price rises caused by the war in Ukraine, which started at the end of February.

Grant Fitzner, ONS chief economist, said: “Inflation rose steeply in February as prices increased for a wide range of goods and services, for products as diverse as food to toys and games. Furniture and flooring also contributed to the rise in inflation as prices started to recover following new year sales.”

Paul Craig, portfolio manager at Quilter Investors, said: “All eyes will be on the Chancellor today as he presents his Spring Statement and announces measures the government will take to tackle the ongoing cost-of-living crisis. 

“This morning’s inflation data shows just how dire the situation is, and there is a clear need for the government to act to help save many from slipping into financial difficulty as their wages are quickly swallowed up.”

Dan Boardman-Weston, CIO at BRI Wealth Management, said: “The data continues to point towards another few months of rises in the rate of inflation, but we expect this to ease as we head into the summer.”

The Bank of England, which raised interest rates to 0.75% last week, has forecast that inflation will hit 8% in the spring, with further rises later in the year pushing it towards 10% and possibly beyond.

17 March: Bank of England Hikes Interest Rate To 0.75% In Bid To Tackle Inflation 

The Bank of England has raised the Bank rate of interest to 0.75%, an increase of 0.25 percentage points. The move follows a similar increase by the Federal Reserve in the United States yesterday, which saw rates there increase from 0.25% to 0.5% (see story below).

Central banks are increasing rates in a bid to remove inflationary pressures triggered by rising energy, fuel and food prices. The latest UK inflation rate, announced last month, is 5.5%, but this is expected to rise steeply when the impacts of the conflict in Ukraine are factored into the calculation.

Prior to the conflict, the Bank of England said inflation would rise above 7% this spring. Some forecasters are saying a rate above 8% is possible, largely due to a 54% increase in domestic energy bills, but the most pessimistic have forecast rates above 10%.

The most recent inflation figure for the US is 7.9% – a 40-year high. Again, this is expected to rise further in the coming months.

The Bank of England has now increased the Bank rate three times since December 2021, and more rises may be forthcoming.

This will be bad news for those with variable rate and tracker mortgages, whose repayments likely increase to reflect the higher cost of borrowing. Homeowners with fixed rate deals will likely have to pay more when their term comes to an end and they need to find another loan.

The news will be more positive for savers if institutions pass on the increase in rates.

The next Bank of England Rate announcement is due on 5 May.

16 March: US Raises Interest Rates, Bank of England Mulls Next Move

The United States Federal Reserve has increased interest rates from 0.25% to 0.5% today in a bid to counter 40-year high inflation rates. This is the first increase in US interest rates since 2018.

The country’s consumer price index rose by 7.9% in February, although the figure did not take account of the latest inflationary pressures flowing from the conflict in Ukraine and economic sanctions imposed on Russia (see story below).

The Fed has an inflation target of 2%. The interest rate rise is intended to cool the economy by reducing the availability of ‘cheap’ money. Further rate hikes may be made in the coming months – in the Fed’s words: “… ongoing increases in the target range will be appropriate.”

The Bank of England will announce its latest decision on the UK Bank rate tomorrow (Thursday). The rate has increased twice since December and now stands at 0.5%.

The UK rate of inflation stands at 5.5% (the Bank’s target is also 2%). Economists are expecting a rise of 0.25 percentage points to take the rate to 0.75%, which would feed through to mortgage rates – although many lenders have ‘priced in’ a rate rise in their current offers.

Existing borrowers on variable rate and tracker deals would see their cost of borrowing increase in the next couple of months. Those on fixed rates would likely be faced with more expensive loans when their current deal comes to an end.

There has been some speculation that the Bank rate could double to 1% given the mounting inflationary pressures in the economy. The Bank of England has already conceded that inflation will top 7% this spring, but again the prediction was made ahead of the Ukraine crisis. Some commentators have suggested inflation could hit double figures in the next few months.

14 March: ONS Overhauls Inflation Price Basket

The Office for National Statistics (ONS), which measures the rate of inflation in the UK, has announced changes to the basket of items it uses to track how prices are moving.

The ONS tracks around 730 prices for goods and services for its consumer price indices. It updates its basket annually “to avoid potential biases that might otherwise develop, for example, because of the development of entirely new goods and services. These procedures also help to ensure that the indices reflect longer-term trends in consumer spending patterns.”

The latest updates sees the inclusion of a range of new items, with others being dropped because of changing patterns of consumer behavior. Many of the changes can be seen to reflect the impact of the pandemic and the associated lockdowns.

New items include meat-free sausages, sports bras and crop tops, anti-bacterial surface wipes, craft and hobby kits for adults and pet collars.

Items dropped from the list include men’s suits, coal, doughnuts and hard-copy reference books.

Reasons for change

Not all the changes can be traced directly to the pandemic. For example, meat-free sausages have been added to expand the range of “free from” products in the basket, reflecting the growth in vegetarianism and veganism. 

However, antibacterial surface wipes have been added to the list of cleaning products to represent current cleaning trends together with the demand for antibacterial products in response to COVID-19.

Similarly, pet collars have been introduced because of increased consumer spending on pet accessories linked to the rise in pet ownership more generally since the start of the pandemic.

Changes are also made to the basket in response to wider changes in society. For example, the sale of domestic coal will be banned in 2023 as part of the government’s actions to combat climate change.

The ONS says dropping it from the basket in 2022 protects the index from the possibility of being unable to collect price information towards the end of the year and from abnormal price movements, which could be seen as the deadline approaches for the ban to come into effect.

It says that, in some cases, items are dropped to reflect decreasing expenditure, such as doughnuts: “Research and anecdotal evidence from retailers has indicated that sales have fallen, potentially because of the rise in homeworking. 

“Most individual cakes, which is what ‘doughnuts’ represents, are sold in multipacks, and a separate multipack cake item remains in the basket.”

10 March: US Inflation Hits 40-year High

The US consumer price index surged by 7.9% in the year to February 2022, propelling the country’s inflation rate to its highest figure since January 1982.

The increase, reported today by the US Bureau of Labor Statistics, was driven higher by rising costs for gas, food and housing, but did not factor in most of the energy price rises brought about following Russia’s invasion of Ukraine on 24 February.

Before the latest inflation news, the US Federal Reserve was already under considerable pressure to tame inflation by raising interest rates when it meets next week.

In addition to imposing sanctions on Russia’s central bank and excluding the country from the global financial system, the US administration, led by President Joe Biden, has banned imports of Russian oil and gas.

Last month, faced with the same inflationary headwinds affecting all major economies, the Bank of England (BoE) increased the Bank rate from 0.25% to 0.5%. This was the second increase in the space of three months, following a rise from 0.1% to 0.25% in December 2021.

The BoE’s Monetary Policy Committee also meets next week to decide if further monetary tightening is required as UK households continue to grapple with a cost-of-living crisis caused by soaring inflation exacerbated by the relentless surge in energy prices.

Any rise in the UK bank rate would inevitably be reflected in increased interest rates for borrowers, particularly those with mortgages.

Richard Carter, head of fixed interest research at investment firm Quilter Cheviot, said: “Any hopes that inflation may have been starting to reach its peak in the US have been well and truly dashed. Given this data captures the period before Russia’s invasion of Ukraine, inflation won’t be stopping there. A rate hike at the Fed’s meeting next week looks like a certainty.”

Caleb Thibodeau at Validus Risk Management said: “It will take a formidable change in circumstances to steer the Fed away from a hike next Wednesday and at all subsequent Federal Open Market Committee meetings this year.”

16 February: Inflation Hits 30-Year High With Worse To Come This Spring

UK inflation, as measured by the Consumer Price Index (CPI), rose to a 30-year high in the year to January 2022, according to the latest figures from the Office for National Statistics (ONS). 

Consumer prices increased at an annual rate of 5.5% in January 2022, up from 5.4% the previous month and well above the figure of 0.7% recorded in January last year. Prices last accelerated this quickly in March 1992.

Inflation is now over three percentage points higher than the 2% target set for the Bank of England (BoE) by the government. The BoE forecasted recently that UK inflation will exceed 7% this spring before starting to fall back after that. 

The ONS said clothing, footwear, the rising costs of household goods and rent increases helped push up prices last month. But it added that this January’s rise was partially offset by lower prices at the petrol pumps, following record highs at the end of last year.

Fuel prices have since peaked once more, hitting £1.48 per litre for petrol and £1.51 per litre for diesel. Along with the hike in the domestic energy cap by 54% in April, this is the reason for the Bank’s gloomy short-term forecast.

Grant Fitzner, chief economist at ONS, said last month witnessed traditional price drops in some sectors but that “it was the smallest January fall since 1990, with fewer sales than last year.” 

The latest ONS announcement is likely to pile more pressure on the BoE to take an aggressive stance on interest rates. The BoE has already announced two rate rises in the space of the last three months. The Bank rate currently stands at 0.5%.

Jason Hollands of investing platform Bestinvest said: “Further and material increases in inflation are almost certainly coming, in part due to the lifting of the cap on energy bills. So, the thumb screws are going to continue to tighten over the coming months, with the Bank forecasting inflation will hit 7% by Easter.”

Rupert Thompson at wealth manager Kingswood said: “Inflation will head higher still over coming months, likely peaking at around 7.5% in April when the increase in the energy price cap feeds through. Today’s data leave a further 0.25% rate hike in March looking all but a done deal.”

Last month, four of the nine members of the Bank’s Monetary Policy Committee, which decides interest rates, voted for an increase in the Bank rate of half a per cent to 0.75%. If this hawkish sentiment prevails at the next meeting in March, the rate could double to 1%.

19 January: Consumer Prices Index Highest In 30 Years

UK inflation, as measured by the Consumer Prices Index, jumped to 5.4% in the 12 months to December 2021 – its highest level in 30 years – according to the latest figures from the Office for National Statistics (ONS).

The CPI figure last reached this level in March 1992. 

In line with recent economic announcements around the world UK inflation has spiked in recent months – November’s CPI figure came in at 5.1% – leaving UK households facing the threat of a deepening cost-of-living crisis. The US recently revealed a figure of 7.5%.

December’s figure is well over three percentage points higher than the Bank of England (BoE) 2% target, set by the government. 

The latest inflation data could prompt a second, rapid rise in interest rates following on from the Bank of England’s decision before Christmas to hike the bank rate to 0.25% from its all-time low of 0.1%.

According to the ONS, a range of factors are responsible for the latest inflation increase. These include rising prices for food, restaurant bills, hotel costs, furniture, household goods, clothing and footwear in the run-up to Christmas. 

But Grant Fitzner, ONS chief economist, said there was little evidence that pandemic-imposed restrictions had contributed to rising prices: “The closures in the economy last year have impacted some items but, overall, this effect on the headline rate of inflation was negligible.”

Interest rates decision

Paul Craig, portfolio manager at Quilter Investors, said: “The Bank of England was vindicated in its decision to hike rates in December in the face of Omicron uncertainty, but it could still go either way when its Monetary Policy Committee [MPC] meets in early February.

“The MPC will be faced with a difficult trade-off between ensuring financial stability or helping households cope with a cost-of-living crisis that is set to squeeze household finances over a difficult winter period.”

What to expect this April

In addition to an increase in National Insurance Contributions in April and a sustained freezing of personal tax allowances, which will push many earners into higher tax brackets, households are facing the prospect of huge energy bill increases due to a rise in the official price cap.

Analysts suggest prices could increase by up to 50% when the cap is adjusted in April. The scale of the increase will be announced in early February.

Last autumn, having temporarily suspended calculations based on the so-called ‘triple lock’, the government confirmed it would be increasing a range of state benefits from April 2022 based on September 2021’s CPI figure of 3.1%.

For 2022-23, the full State Pension will increase from its present rate of £179.60 a week to £185.20 a week (£9,630 a year).

Working-age benefits, benefits to help with additional needs arising from disability, and carers’ benefits will all rise by the same rate of 3.1% from April as well.

Other payments due to rise include Universal Credit, Personal Independence Payments, Child Benefit, Jobseeker’s Allowance, Income Support and Pension Credit.

15 December: UK Inflation Reaches Highest Level In Over 10 Years

Inflation, as measured by the Consumer Price Index (CPI), rose by 5.1% in the 12 months to November 2021 – its highest level in over a decade – according to the latest figures from the Office for National Statistics (ONS).

The inflation figure has been on a sharp upward trajectory in the latter part of 2021 – October’s figure came in at 4.2% – and is now at its highest level since September 2011. 

The latest figure was well above City forecasts of 4.7% and now stands at more than double the Bank of England’s 2% target, set by the government. The steep rise from October to November could contribute to a potential hike in interest rates when the UK’s central bank reveals its final decision of the year on the subject later this week. 

Grant Fritzner, ONS chief economist, said: “A wide range of price rises contributed to another steep rise in inflation.” 

He added that the price of fuel had increased notably, “pushing average petrol prices higher than we’ve seen before”. Other contributors included increased clothing costs, along with price rises for food, second-hand cars and increased tobacco duty.

According to Canada Life, the change in inflation leaves the UK’s near-40 million households collectively needing to find an extra £39.6 billion a year to maintain their standard of living compared with 12 months ago.

Andrew Tulley, technical director at Canada Life, said: “The latest inflation numbers give us little hope for any financial festive cheer. We are all feeling the pinch and the reality is the average UK household will need to find over a thousand pounds extra next year to maintain current living standards.”

The UK figures follow recent inflation data from the US which showed that consumer prices in November had increased at their fastest pace in nearly 40 years. 

Last week, the US Bureau of Labor Statistics reported that its consumer price index had risen by 6.8% in the year to November. The last time the figure had increased so rapidly was in 1982.

6 Dec: Bank Of England: Inflation Could ‘Comfortably Exceed’ 5% in 2022

The Bank of England has warned that inflation could ‘comfortably exceed 5%’ in the next few months, when energy regulator Ofgem puts up its energy price cap in April 2022, raising the cost of energy bills for millions of UK households.

The cap is based on trailing average prices in wholesale energy markets – with the relevant period for the next adjustment in April falling between August 2021 and February 2022.

Speaking to the Leeds Business School, the Bank’s deputy governor of monetary policy, Ben Broadbent, said: “Two-thirds of the way through we can already be reasonably certain (unfortunately) of a further significant rise in retail energy prices next spring.”

Ofgem’s current price cap, which took effect on 1 October, is set at a record £1,277 a year or £1,309 for a prepayment meter tariff cap. The cap applies to households on a standard variable tariff (SVTs) consuming an average amount of energy. It refers to unit price of energy meaning that – depending on how much energy is used – some households will pay less or more.

Inflation is already running high, with annual growth recording 4.2% for October, as measured by the Consumer Prices Index (CPI). This was up from 3.1% in September and is more than double the 2% target set by the Government.

The next inflation announcement is on 15 December.

Mr Broadbent told Leeds Business School: “I’m coming here at an extraordinary time for the economy in general and for monetary policy in particular.”

17 Nov: Inflation Near 10-Year High, Prompts Rate Hike Expectations

Inflation – as measured by the Consumer Price Index (CPI) – rose by 4.2% in the 12 months to October 2021, according to figures out today from the Office for National Statistics. This follows a 3.1% rise recorded in September,

Today’s figure is the highest 12-month inflation rate since November 2011, when the CPI annual inflation rate was 4.8%.

The figure is more than double the Bank of England’s 2% target, set by the government. This is stoking expectations the Bank will hike its key interest rate in December in a bid to cool the economy – a move that would likely trigger an increase in mortgage rates.

The current rate of 0.1% was widely tipped to increase earlier this month, but the Bank decided to hold fire at its meeting on 4 November.

The steep climb in the cost of living is blamed on the increase in the domestic energy price cap on 1 October, rising forecourt pump prices and inflationary pressures across the economy as companies struggle with increases in the cost of raw materials.

Prices in hotels and restaurants have also increased relative to last year because hospitality firms no longer benefit from a reduction in their VAT bills.

Economists warn that any increase in the Bank Rate will not affect the trajectory of inflation for several months. Dan Boardman-Weston at BRI Wealth Management, said: “Inflation is going to keep getting worse over the coming months as supply stays stretched, demand stays robust and base effects technically push the rate of inflation higher. 

“This is undoubtedly going to put pressure on the Bank of England to raise rates, which we suspect they will have to do in the next few months given the high levels of inflation and robust labour market.”

Supply and demand

Inflation in the United States topped 6% in October. As with the UK, the hope is that the reasons for prices rising so sharply are “transitory”, but global supply chain issues married to increasing demand as economies emerge from the Covid-19 crisis is resulting in increasingly gloomy forecasts in some quarters.

However, Mr Boardman-Weston cautions against any knee-jerk reaction: “Nothing we see leads us to believe that this inflation is permanent and as we start heading into Spring next year the figures will start falling rapidly. 

“The Bank needs to be careful they’re not too hasty in tightening monetary policy as a policy misstep could do more harm to the economy than this transitory inflation we are witnessing.”

While mortgage customers will view the latest inflation figures with concern, savers may see a glimmer of hope that they may earn a better rate on their accounts – although any improvement would need to be set into the context of rising prices.

The Bank will announce its latest Bank Rate decision on 16 December.

20 October: Inflation Dips To 3.1% In September, Sets Level Of 2022 Pension Rise

UK inflation bucked a recent upwards trend and dipped slightly last month, according to the latest official figures from the Office of National Statistics (ONS).

The Consumer Prices Index (CPI) measure rose by 3.1% in September 2021, slipping back from 3.2% in August. 

The ONS said increased prices for transport were the main contributor to an overall rise in prices, along with household goods, food and furniture.

It added that restaurants and hotels helped pull the inflation rate lower. This was because prices rose less this summer compared with the same time last year, when the government’s Eat Out To Help Out scheme was running.

Despite a month-on-month fall in the inflation rate, the level remains well above the Bank of England (BoE) target of 2%. 

September’s inflation figure is unlikely to have an impact on the BoE’s imminent decision on interest rates, due at the beginning of November, as a pause in the rate moving upwards had been anticipated.

Commentators believe September’s dip in inflation was a blip, with further rises anticipated in the coming months. This is because the latest numbers have yet to take into account either the recent surge in energy prices or the petrol pump crisis of a few weeks ago. 

Laith Khalaf, head of investment analysis at brokers AJ Bell warned that: “Inflation will still get worse before it gets better. Inflation is being broadly felt, seeing as the biggest drivers are housing and transport costs, which are unavoidable for almost everyone in the country.”

Pension determinator

September’s inflation figure of 3.1% will be used to determine next year’s rise in the state pension. 

This means that, from April 2022, a pensioner who receives the new full state pension can expect a rise from £179.60 a week to £185.15. For those on the basic state pension, the current figure of £137.60 will rise to £141.86 next spring.

Next year’s increase could potentially have been as high as 8%, had the government decided not to scrap its so-called ‘triple lock’ for one year, on the back of an artificially distorted picture of UK wage growth following the pandemic. 

The triple lock aims to increase the state pension in line with the highest of three measures: 2.5%, CPI inflation and earnings. Earlier this year, the government said it would suspend the use of the latter after earnings data spiked as people returned to work following the termination of its furlough programme.

15 September: Inflation Hits 3.2% With Further Rises In Energy Pipeline

The UK inflation rate jumped sharply last month, according to the latest figures from the Office of National Statistics (ONS).

The Consumer Prices Index (CPI) rose by 3.2% in August, up from 2% a month earlier. The 1.2 percentage point rise is the largest recorded by the CPI National Statistic 12-month inflation rate series, which began in 1997. 

Inflation in the UK topped 10% in 1990 and was over 26% in 1975.

The latest figures mean inflation is now at its highest rate since March 2012 on the back of higher prices for transport, restaurants and hotels.

Last summer, prices for food and drink were discounted because of the government’s temporary Eat Out to Help Out response to the pandemic.

Used car prices also contributed to the rise. Demand is high because of a reduction in the supply of new models, which itself is attributed to a shortage of the computer chips used in their manufacture.

Rising energy prices are expected to fuel further increases in the rate of inflation over the coming months.

The latest CPI figure far exceeds the 2% official target set by the Bank of England (BoE). 

Jonathan Athow, deputy national statistician at the ONS, said: “August saw the largest rise in annual inflation month-on-month since the series was introduced almost a quarter of a century ago.

“Much of this is likely to be temporary, as last year, restaurant and café prices fell substantially due to the Eat Out to Help Out scheme, while this year, prices rose.”

August’s inflation rate rise coincides with a recent spike in prices across wholesale energy markets, a combination that could have serious financial implications for millions of the UK’s energy customers this winter. 

Last month, Ofgem, the UK’s energy regulator, announced it is raising its cap on standard variable rate default tariffs by 12% to £1,277, its highest-ever level. The new cap takes effect from 1 October, when the prepayment tariffs cap will rise by £153 to £1,309.

Around 15 million households will be hit by the cap increases. Ofgem recommends that those on default rates should switch their energy tariff to find a cheaper alternative. Prepay customers may also be able to save by switching.

Next month’s data, covering September’s inflation figures, will determine the level at which the state pension will be uprated from April 2022 under the new, temporary ‘double lock’ recently introduced by the government.

Update 18 August: Inflation Rate Dips To 2%

The UK inflation rate slowed down last month according to the latest figures from the Office of National Statistics (ONS).

The Consumer Prices Index (CPI) rose by 2% in July, down from 2.5% a month earlier. The dip, driven by an easing in the price of clothing, footwear and recreational goods, means the inflation figure is now in line with the Bank of England’s official target of 2%.

Jonathan Athow at the ONS, said: “Inflation fell back in July across a broad range of goods and services, including clothing, which decreased with summer sales returning after the pandemic hit the sector last year.

“This was offset by a sharp rise in the price of second-hand cars amid increased demand, following a shortage of new models.”

Commentators say a dip in the headline inflation rate could be temporary. The Bank of England has forecast that consumer price growth could yet rise to 3% this month and peak around 4% later in the autumn.

Richard Hunter at Interactive Investor said: “The relief of a slowdown in inflation is likely to be short-lived, with upward pressures remaining in the pipeline.

“Cost inflation is still bubbling underneath the surface, both in terms of blockages in the supply chain elevating prices, as well as pressures on the labour supply. In addition, the proposed hike in energy prices will add some fuel to the inflationary fire as the year progresses.”

Despite a month-on-month fall in the CPI, Sarah Coles at broker Hargreaves Lansdown had this warning for savers: “Even at 2%, inflation can do serious damage to your savings, so we need to protect ourselves by refusing to settle for miserable rates from the high street (banking) giants. These usually offer 0.01% on easy access accounts, while the average (for all savings accounts) is 0.07%, and the most competitive without restrictions is 0.65%.

“Fixing your savings for 12 months will earn you up to 1.3%, which will significantly reduce the damage done by inflation,” she added.