UK inflation has sped up to its highest level since October last year, and is likely to all but seal a rate hike from the Bank of England at its November meeting. As in previous months, petrol was the main driver. Annual inflation for motor fuels reached 29.8% as crude rallied. Diesel hit 200p for the first time in the past month, and there are few signs of relief, with Brent trading above $110/barrel and rising for the day.
There is some slight relief in food and drinks, where the rate stayed the same in September. The BOE does not expect that to hold for the rest of the year, but so far food prices are staying relatively under control, helped by a hyper-competitive grocery market. Policymakers have recently been weighing inflation risks, notably the likelihood that second-round effects will start to materialise in the economy alongside a weaker labour market. Yesterday's UK jobs report showed things are stabilising, not necessarily improving but not getting worse. Megan Greene, one of the BOE's rate-setters, said the labour market is stronger than officials thought and that the easing of wage pressures has stalled. If that view spreads across the more dovish policymakers, the chance of a hike will increase with it.
Hotter inflation threatens higher bond yields for the UK, an unwelcome outcome given its borrowing needs. Government bond dealers surveyed by Bloomberg think the country will need £3 billion more than previously planned in gilt sales this fiscal year because of lofty debt costs and public spending needs. The Debt Management Office is also expected to lean more heavily on shorter-dated bond sales.
The increase in debt costs has left less room for the government to address rising energy bills, cost-of-living measures or higher defence spending. That is top of the list of headaches for Chancellor John Healey ahead of next week's budget, where raising the surcharge on banks is among the measures being considered. Citigroup UK CEO Tiina Lee said that while this would be "disappointing," it is "not everything," and that projecting fiscal responsibility is paramount.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing