The Daily Update: UK Inflation Rips Higher

In yesterday's daily update I wrote about how the Governor of the Bank of England Andrew Bailey had told MPs that he is ‘very uneasy’ about the inflation outlook and that whilst he voted to maintain interest rates at 0.1% at last month’s meeting, it had been a very close call. His actual words were ‘I’m very uneasy about the inflation situation’ adding ‘I want to be very clear on that. It is not, of course, where we wanted to be, to have inflation above target’. He also was at pains to emphasise that ‘All meetings are in play’ as they are in ‘the price stability business’.

Well, this morning that uneasy feeling that Bailey has just got a bit (maybe more than a bit) worse. Figures showed that UK inflation in October again ripped higher, rising to a 10-year high of 4.2%, more than double the Bank of England’s inflation target. This was well above the 3.9% market estimates, and up from 3.1% in September. The month-on-month figure was also 0.3% above market estimates of 0.8%, September’s figure was just 0.3%.

The numbers were driven by ‘an increase in household energy bills due to the price cap hike, a rise in the cost of second-hand cars and fuel as well as higher prices in restaurants and hotels’ the chief economist at the Office for National Statistics said, adding ‘Costs of goods produced by factories and the price of raw materials have also risen substantially and are now also at their highest rates for at least 10 years’. The price of second hand cars jumped 4.6% last month alone, and are up over 27% since April.

However, the UK’s 10-year high inflation figures were beaten by those in the European Union where year-on-year numbers saw inflation hit a new 13-year high in October, at 4.1%, again well ahead of the consensus forecast of 3.7%. September’s figure had come in at ‘only‘ 3.4%.

In addition to these latest figures there could be even darker clouds on the horizon, with regards to the cost of energy at least. Yesterday European gas prices surged nearly 20% after a German regulator suspended Russia’s controversial Nord Stream 2 link certification. The German regulator said it suspended the certification procedure to allow Switzerland-based Nord Stream 2 AG, the operator of the pipeline owned by Gazprom to set up a German subsidiary to meet European Union rules.

And last but by no means least, according to Goldman’s and Bank of America, oil will start to march higher in the coming weeks and months. A few weeks ago, Goldman Sachs predicted that oil would hit $100 a barrel by year end. Well, Bank of America was on the same page as Goldmans, but has now upped the ante, calling for oil to hit $120 a barrel by next summer. That would be a near 50% rise from the current levels, already near their 2014 highs. Bank of America expects the surging demand for oil to persist, and coupled with the ongoing constraints in refining capacity, will in turn continue to send the price of oil higher.