UK inflation has accelerated to the highest rate in 30 years, squeezing living standards and putting pressure on the Bank of England to raise interest rates again.
Consumer prices rose at an annual rate of 5.5 per cent last month, up from 5.4 per cent in December and well above the 0.7 per cent in January 2021, data published by the Office for National Statistics showed on Wednesday.
UK inflation was more than double the Bank of England target of 2 per cent and was the highest since March 1992, when it reached 7.1 per cent.
Core inflation, which excludes the more volatile energy, food, alcohol, and tobacco prices, rose to 4.4 per cent in January, up from 4.2 per cent in the previous month.
Economists polled by Reuters expected CPI inflation to remain at 5.4 per cent and core inflation to increase to 4.3 per cent.
The Bank of England expects inflation to peak at about 7 per cent in April, when Ofgem, the energy regulator, will increase its default energy tariff price cap.
Elizabeth Martins, economist at HSBC, forecasts an even higher peak but expects inflation to come down to 4.4 per cent by the end of the year.
She argued that even with the fiscal support announced by the government earlier this month, “this higher inflation means the income squeeze will be more intense than we had previously expected”. She forecast real household incomes to fall 2.5 per cent in 2022 and to be flat in 2023.
Together with the strong employment data published on Tuesday, high inflation supports economists’ expectations that the Bank of England will raise borrowing costs again this year.
Martins expects the bank rate to rise to 1.25 per cent by August, with increases in March, May and August, but this is still below wider market expectations. The central bank raised rates in December and February from their historic low of 0.1 per cent to 0.5 per cent.