UK inflation accelerated to a 30-year high of 7% in March, meaning household finances are being squeezed more than expected and the Bank of England will be under more pressure to raise interest rates.
The Office for National Statistics revealed the consumer price index (CPI) was up from 6.2% in February, ahead of economists’ expectations of 6.7% and the Bank's monetary policy committee anticipated level of inflation of “around 6%” at their meeting last month.
This resulted in the sharpest fall in the value of real wages since 2014, with wages data published yesterday revealing they are only rising 5.4%.
Core inflation, which excludes more volatile prices such as energy, food and alcohol, rose to 5.7% from 5.2%, again higher than the consensus forecast of 5.4% and also reaching a new 30-year high.
The 9.9% month-on-month surge in fuel in March was a big contributing factor to the increase in the headline rate of CPI, the largest monthly rise on record.
Fuel inflation is now at 30.7% versus a year ago.
Food and drink inflation rose to 5.9% from 5.1%, its highest rate since September 2011, as supermarkets passed on more of the recent surge in producer prices, despite protestations from the likes of Tesco today that it is “laser-focused on keeping the cost of the weekly shop in check”.
“The surge in agricultural prices triggered by the war in Ukraine means we expect food inflation to soon climb to 7.0%,” said Ruth Gregory at Capital Economics.
She said the rise in CPI inflation in March continued the run of upward surprises “and will add more pressure on the Bank of England to raise interest rates rapidly”.
Capital Economics thinks the Bank’s monetary policy committee will hike interest rates to at least 2.00% next year, from 0.75% currently.
Fellow economist Samuel Tombs at Pantheon Macroeconomics said this level of inflation “seals the deal on a further increase in interest rates at the MPC’s next meeting in May”.
He noted that the MPC’s preferred measure of domestically-generated inflation, which strips out transport services, education and package holidays from the services index, increased to 3.9% from 3.2%.
Looking ahead, Tombs now expects headline CPI inflation to leap to about 8.8% in April as the energy price cap spikes and food and core goods CPI inflation rises further, with inflation easing only to about 7.8% by the end of this year.
“The MPC, therefore, still has good grounds for arguing that a further substantial tightening of monetary policy would do little to restrain inflation in the near term but would run the necessary risk of pushing it substantially below the 2% target next year.”
Sharon Graham, general secretary of trade union Unite, said: “The double whammy of soaring inflation and falling wages is creating an historic cost of living crisis for workers. The bankers and big business are trying to force workers to pay the price for the pandemic.”