(Commonwealth_Europe) Inflation in the U.K. reached a 10-month high in January, according to official data released on Wednesday. This increase in inflation is expected to dampen expectations for rapid interest rate cuts from the Bank of England shortly. The Office for National Statistics reported that inflation, measured by the Consumer Prices Index (CPI), surged to 3% in the year leading up to January. This represents a significant increase from the 2.5% recorded in December, which has taken economists by surprise. While experts had predicted a rise to 2.8%, the scale of the spike is a surprise and is likely to raise concerns among Bank of England policymakers.
The inflation increase was primarily driven by several key factors: higher airfares, rising food prices, and a hike in private school fees. These increases followed the new Labour government’s decision to impose a sales tax, which contributed to the price pressures. The spike elevated inflation above the Bank of England’s 2% target, widely regarded as the optimal rate for economic stability.
At a time when the Bank of England has been struggling with slow economic growth in the country, the rise in inflation is particularly troubling. Earlier in February, the central bank reduced its key interest rate by a quarter of a percentage point to 4.5%. This move was the third reduction in just six months, and it came after the bank revised its 2025 growth forecast for the U.K. to a modest 0.75%. If the economy continues to grow at such a slow pace, it will likely result in disappointment for the Labour government, which has prioritized economic growth as its central policy aim. A lack of growth would make it harder to improve living standards and generate the funding needed for under-resourced public services. As a result, the Labour Party’s popularity has waned since it took office in July.
The government is now hoping the Bank of England will cut interest rates further to stimulate the economy, which could lead to lower mortgage rates and cheaper loans. However, such cuts would also reduce the returns offered to savers, and policymakers are likely to be cautious. Most economists expect inflation to keep rising in the coming months, driven by higher domestic energy bills, but they predict it will start to decline later in the year. This anticipated decrease could give the Bank of England more room to continue easing interest rates, although the pace of these cuts may be slower than originally expected.
Luke Bartholomew, deputy chief economist at abrdn, noted that another rate cut in March now seems unlikely, given the current inflationary pressures. Instead, he suggested that the Bank of England would likely proceed with its gradual pace of easing for the time being. The possibility of faster rate cuts later in the year will depend largely on whether inflation returns to the target level of 2%. If inflation trends downward as expected in the second half of the year, it could allow for more aggressive rate reductions. However, any acceleration in rate cuts will be contingent on inflationary pressures easing significantly toward the central bank’s target.
