Consumer price inflation in the United Kingdom surged to 10.1% in July, the highest level since February 1982, making it the first major affluent country to experience double-digit price increase as rising food costs put a strain on household budgets.

The increase from June’s annual rate of 9.4% exceeded all economists’ forecasts in a Reuters poll, fueling investor bets that the Bank of England will continue to raise interest rates quickly.

Despite warnings earlier this month that a recession was imminent, the Bank of England hiked its key interest rate by 0.5% to 1.75%, the first half-point increase since 1995. In October, when regulated home energy rates are set to climb, inflation reached 13.3%.

Following the latest numbers, Citi economist Benjamin Nabarro predicted that inflation will rise above 15% early next year. 

“With the Bank focused on signs of more persistent inflationary pressures, we think a hawkish reaction is now all but inevitable,” he told Reuters.

Most economists polled by Reuters earlier this week expected the Bank of England to raise interest rates by another half point to 2.25% following its next meeting in September. 

Two-year British government bond yields, which are sensitive to interest rate expectations, reached their highest level since 2008, with investors pricing in a peak of 3.75% around March 2023, up from 3.25% previously.

Britain is not alone in seeing rapid price increases, but it is the first of the Group of Seven nations to have inflation rise above 10%.

There are also indications that it may face growing inflation for a longer period of time than other economies, especially counterparts in Europe, where oil prices have skyrocketed following Russia’s invasion of Ukraine.

Many economists believe that US inflation has already peaked, having fallen to 8.5% in July from a four-decade high of 9.1% in June. 

British Finance Minister Nadhim Zahawi stated that battling inflation is his top priority, and that the government is looking into ways to lower home energy prices.

According to the Office for National Statistics (ONS) data released on Wednesday, prices rose 0.6% in July compared to June on a non-seasonally adjusted basis.

The main cause of the jump in CPI inflation from June to July was a 12.6% increase in annual food prices, the largest since 2008. Higher energy and petrol prices were the main drivers for the year overall. Takeaway meals were more expensive, as were package holidays.

The annual rate of retail price inflation – an older measure that is still commonly employed in business contracts, rail fares, and government bond payments – reached 12.3%, its highest level since March 1981.

Source: Reuters

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