Inflation sees unexpected rise to 10.4%

February annual core inflation was 6.2% compared to 5.8% in January.

The ONS has reported UK headline CPI inflation at an annual 10.4% for February, significantly higher than a Reuters survey consensus of 9.9% and a rise from the 10.1% recorded in January.

In monthly terms, CPI was up 1.1% against a consensus of 0.6%, and compared to a fall of 0.6% in January.

February annual core inflation (excluding food, energy, alcohol, and tobacco) was 6.2% compared to 5.8% in January. In monthly terms, core CPI increased 1.2% compared to a fall of 0.9% in January.

The largest upward contributions to the monthly change in inflation came from restaurants, clothing, and particularly food where prices rose at their fastest rate year-on-year since 1977.

Nathaniel Casey, investment strategist at Evelyn Partners, commented: Inflation has shocked almost everyone by re-accelerating in February. In monthly terms, headline CPI jumped by a sharp 1.1%, while the headline annualised rate has increased slightly, shielded to a certain extent by the base effects coming in from last year. This stickiness has been especially prevalent in core inflation which gained 1.2% on the month, it’s largest month-on-month acceleration since 1993.

“The main issue seems to be tightness in the labour market continuing to put pressure on wage growth. The risk is that rising wages will feed through to inflation, causing it to become entrenched. The latest data shows that underlying wage rates (ex-bonuses) have re-accelerated to 6.5% on a three-month moving average, near its highest rate since the summer of 2021.

This resurgence of inflation leaves us a long way off the Office for Budget Responsibility’s forecasts of inflation coming down to 2.9% by the end of 2023. While inflation continues to remain elevated, the Bank of England have a fine line to tread between restoring price stability and limiting additional pressure on the banking sector when they vote on the next monetary policy decision tomorrow.”

Giles Coghlan, chief market analyst at HYCM, said: “Unfortunately, the tide does not yet appear to be turning on inflation, as today’s annual CPI figures have come in hotter than expected, exceeding City analysts’ maximum forecasts at 10.4%. Worryingly, the core inflation moves back up to 6.2% despite expectations of a fall, signalling that the disinflationary process has yet to begin in the UK.

“Expect todays figures to fuel market tensions. Although there has been some debate that recent fears of banking contagion could see the Bank of England pausing its rate hiking cycle entirely, today’s figures complicate matters, adding pressure for the central bank to hike rates again despite wider concerns about the economy. With the Federal Reserve due to meet this evening at 18:00, central bank watchers can now expect sticky inflation figures to feed into the BoE’s decision-making. Currently, a 25 basis point hike is cautiously anticipated by the markets, where a 62% chance of a BoE hike is now expected tomorrow.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, added: “There is no respite for punishing inflation for consumers and companies, with prices becoming even hotter in February. There had been high hopes that it would finally have retreated from its double-digit heights, making a march downwards, but it has headed back towards the summit. As restaurants and hotels ratchet up prices faced with the high costs of food and labour, its feeding through to unpalatable hikes for customers. Shoppers are struggling with higher food and clothing prices too, with the cost-of-living headwinds showing little sign of dying down. It had been touch and go about whether the Bank of England will raise rates but now with consumer price inflation rising to 10.4% on the month, it looks increasingly likely a hike will voted through tomorrow. Although the banking turmoil will be front of mind, this latest snapshot and ongoing worries about a tight labour market are likely to tip the balance in favour of a rate hike.”

Rozi Jones (Financial Reporter)

Retirement ProfessionalsInflation sees unexpected rise to 10.4%