Unexpected jump of inflation.

 

The unex­pec­ted jump in infla­tion in Feb­ru­ary, coupled with tur­moil in the global bank­ing sec­tor, leaves Bank of Eng­land rate-set­ters facing an even more challenging decision than usual today.

The latest data, show­ing infla­tion at 10.4 per cent, has rein­forced fears that price rises are increas­ingly being driven by domestic pres­sures in the ser­vices sec­tor rather than the external shock of high energy prices. As these pres­sures tend to be more per­sist­ent, the data has cemen­ted mar­ket expect­a­tions that the BoE will raise interest rates again.

But, in the past fort­night, con­cerns over the health of the global bank­ing sec­tor have intens­i­fied. But price rises were broad-based, includ­ing in sec­tors such as hos­pit­al­ity, where labour costs play a big role. Annual ser­vices infla­tion, con­sidered a bet­ter meas­ure of domestic price pres­sure, accel­er­ated to 6.6 per cent. In the hos­pit­al­ity sec­tor, it rose to its highest rate on record.

Core infla­tion, which strips out volat­ile food, energy, alco­hol and tobacco prices, rose sharply to 6.2 per cent and is now 0.7 per­cent­age points higher than that of the US after broadly mir­ror­ing it for most of last year.

The con­tinu­ing high levels of infla­tion set the UK apart from other large eco­nom­ies. However, Kal­lum Pick­er­ing, eco­nom­ist at invest­ment bank Ber­en­berg noted that yes­ter­day’s data came after infla­tion slowed more than expec­ted in Janu­ary and added that «cau­tion still favours a hold» by the BoE because rais­ing rates before the full impact of global mon­et­ary policy tight­en­ing have unfol­ded «risks adding to prob­lems that would eclipse those asso­ci­ated with excess infla­tion over the medium term».

With the hous­ing mar­ket already reel­ing from the effects of rising mort­gage rates, «the risk is that a hike now could end up push­ing infla­tion below tar­get fur­ther down the line», said Susan­nah Streeter, head of money and mar­kets at Har­greaves Lans­down, a fin­an­cial ser­vices com­pany.

The con­cerns are that the bank­ing scare will end up being a dis­in­fla­tion­ary force by lead­ing to a knock-on effect on lend­ing, which could hit the spend­ing of com­pan­ies and con­sumers if loans are a bit harder to come by.

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