Will inflation figures force BoE to act?

Pardon the Interruption

This article is just an example of the content available to mallowstreet members.

On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.

All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.

The consumer prices index rose by 4.2% in the 12 months to October 2021, the highest in nearly 10 years, and now stands at more than twice the Bank of England’s 2% inflation target. Will the Bank be forced to raise its base rate? 
 
Latest figures from the Office for National Statistics show October’s inflation rate has reached 4.2%, up from 3.1% in September - making for uncomfortable reading for anyone, including pension trustees and the Monetary Policy Committee, which recently held the Bank of England base rate at a historic low of 0.1%. 
 
The biggest contributors to the increase were energy and transport, mainly fuel, prices. A big rise in wholesale gas and electricity prices globally meant the UK regulator has put up the price cap protecting consumers, while average petrol prices reached 138.6p per litre in October 2021, compared with 113.2p per litre a year earlier - the highest since September 2012. 
 

Rate rise could send signal 

 
“Just about everything is getting more expensive,” said Danni Hewson, a financial analyst at investment platform AJ Bell. Many of the pressures forcing prices up seem rather less than transitory. “The cost of goods leaving the factory gate have surged to a 10-year high and supply bottle necks, labour shortages and rising commodity prices don’t look like fizzling out in a hurry,” she added. 
 
"The Bank’s governor Andrew Bailey has admitted he’s worried by the figures and had given serious thought to hiking rates earlier this month,” noted Hewson, but “the question is what good would it do”. She said it might change little in the short term because hiking rates would not solve issues like the global chip or gas shortages, or geopolitical tensions. 
 
However, Hewson thinks that a rate rise would send a signal to companies. “It might give employers a slight pause before they plump for the cheque book to solve their recruitment issues,” she predicted, warning that recent jobs figures combined with high inflation could be a recipe for stagflation, an environment where the economy stagnates but prices rise.  
 
There was a quarterly increase in the employment rate over the third quarter, while the unemployment rate decreased and the economic inactivity rate was largely unchanged. The full impact of the closure of the furlough scheme at the end of September will however only be seen in the next set of figures. 
 
"The Bank doesn’t want to act too soon, to undermine [the] recovery, or to act if its move will only add to the pain for cash strapped consumers, but it will now be under increased scrutiny,” she added. 
 
Sarah Coles, a personal finance analyst at platform Hargreaves Lansdown, agreed that after Tuesday’s better-than-expected jobs figures, higher inflation will boost expectations of an interest rate rise even further.  
 
“During the last meeting, the Monetary Policy Committee highlighted unemployment fears as a key reason for sitting on their hands, but yesterday’s jobs figures are likely to have helped ease those fears,” she speculated. “It may now be ready to unleash the power of a rate rise,” she added. 
 

State pension increases lag behind inflation figures 

 
Others pointed to the impact of inflation on pensioners, who will not see inflation reflected in state pension increases until 2023. For this year, parliament has recently rejected a Lords amendment to the government’s proposals to ignore earnings increases – distorted by the pandemic - in deciding the level of pension rises; state pensions will rise by 3.1%, the 12-month inflation figure for September. 
 
Becky O’Connor, head of pensions and savings at retail platform interactive investor, said for pensioners and others on limited incomes, this level of inflation would be hard to cope with. 
  
“Economists had predicted that September’s inflation rate would look low compared to the inflation on the cards this winter and into 2022. It now looks way behind the rising trend. Those dependent on the state pension will therefore find the essentials they need for basic living harder to afford,” she said. O’Connor said a rise in interest rates now “feels inevitable”. 
 

Will the MPC be forced to hike rates at its next meeting on 16 December?