UK inflation spike ‘unlikely to persist’ but could turn sticky

The expectation had been that inflation would have continued its slow decline from 10.1% in January to 9.9% in February, but that trajectory was swiftly turned upside down.

Danni Hewson, AJ Bell’s head of financial analysis, said the recent shortages of vegetables had contributed to the February increase, alongside bars and restaurants trying to lure back customers after a lacklustre Christmas.

But these drivers were mostly “unseasonable” and “unpredictable”, he added.

UK inflation unexpectedly jumps to 10.4% in February

That is why Modupe Adegbembo, economist at AXA Investment Managers, believes the “sharp reacceleration of inflation is unlikely to persist”, but the current trends signal inflation is at risk becoming “sticky” on its descent.

Although the labour market remains tight, falls in fuel and energy prices will likely be the main drivers of lower inflationary levels in the coming months.

Despite this, many analysts questioned the Office for Budget Responsibility’s prediction of inflation dropping to 2.9% by the end of the year, with Evelyn Partners investment strategist Nathaniel Casey claiming we are still “a long way off” that target.

Bank of England

This means all eyes are now on the Bank of England and its upcoming Monetary Policy Committee.

Many expected rates to remain stable considering the market movements caused by the collapse of SVB in the US and the sale of Credit Suisse in Europe, but consensus predictions have shifted back in favour of hikes.

Victoria Scholar, head of investment at interactive investor, said markets are pricing in a 98% chance of a 25 basis points rise tomorrow (23 March) from the Monetary Policy Committee, although the BoE will likely keep a “close eye on the Fed’s rate decision tonight” (22 March).

BoE ‘could hold rates’ in wake of Credit Suisse and SVB

Some are even expecting two 25bps increases, one tomorrow and one in May, according to Oliver Blackburn, portfolio manager at Janus Henderson Investors.

“This would represent a more cautious pace than the recent rapid 0.5% hikes but still lend credibility to the BoE’s inflation-fighting mandate. Still, gilt yields rose to reflect the probability of further hikes after declining sharply over the last two weeks as investors sought safety amid uncertainty about financial stability.”

But Royal London Asset Management senior economist Melanie Baker said she would not be surprised if the Bank of England “chose to keep rates on hold” tomorrow (23 March). At the same time, she agreed with Blackburn that a further hike in May is very likely “given the strength of domestically driven inflation”.

After 15 months of rate increases just starting to make their effects felt, Russ Mould, investment director at AJ Bell, said central bankers have been performing a “high-wire act for several months, but it feels like the tightrope is getting thinner and higher by the day”.