U.K. Inflation Resumes Its Rise, Defying Expectations

Though the increase was unexpected given recent declines, economists still foresee the pace of inflation falling sharply in months ahead, as the country’s overall economic picture improves. Declines in the pace of price increases are expected from April, with the independent budget watchdog last week forecasting that the inflation rate would end the year at 2.9%.

“It is likely that the trend from here will be sharply lower this year,” said Tom Stevenson, an investment director at Fidelity International. “The latest reading for the year to February is a hangover from the past year’s energy, fuel and food price hikes and tells us little about where inflation is heading from here.”

However, the February pickup in the core rate of inflation—which strips out food and energy—to 6.2% from 5.8% will be a concern for the Bank of England’s policy makers, who are set to announce their latest rate decision on Thursday.

The latest inflation figure makes an 11th rise in the BOE’s key interest rate more likely, economists say.

“The decision will hinge on whether policymakers believe the backward-looking inflation surprise is likely to be the start of a trend or whether it is a one-off linked to normal monthly volatility,” said

Kallum Pickering,

an economist at Berenberg Bank. 

The yield on 10-year U.K. government bonds rose after the release of the inflation figures, an indication that investors view a rate rise Thursday as more probable. Yields move inversely to prices.

The BOE had been confident that price rises would ease sharply over coming months, and last month forecast that inflation would fall to 3% by this time next year. 

April 2022 saw a big rise in home-energy prices as Russia’s invasion of Ukraine sparked fears of a shortage of natural gas. Since that likely won’t be repeated this year, the annual rate of inflation is set to drop sharply this April. Economists at JPMorgan expect the inflation rate will fall to 7.4% in April, and decline further from July, when household energy prices are likely to be falling. 

However, policy makers are worried that businesses will pass on their higher energy costs, and that workers will secure big pay rises that will pressure employers to raise their prices, which would extend the period of high inflation.

That is a concern shared by the European Central Bank. Speaking in Frankfurt, ECB President

Christine Lagarde

said the bank’s policy makers would focus on wages as it assesses the need for further rate rises.

“We are neither committed to raise further nor are we finished with hiking rates,” she said.

She warned that historically low unemployment in Europe could help unleash “a more prolonged cost-push shock coming from wage growth.”

Like the eurozone, the U.K. saw a pickup in food inflation during February as prices rose by 18.2% from a year earlier, according to the Office for National Statistics.  

“Food and non-alcoholic drink prices rose to their highest rate in over 45 years with particular increases for some salad and vegetable items as high energy costs and bad weather across parts of Europe led to shortages and rationing,” said

Grant Fitzner,

the ONS’s chief economist. 

Despite the rise in inflation in Britain, the country’s overall outlook is far less gloomy than it was entering the winter.

After some of the biggest strikes in decades, sparked by what is referred to in the U.K. as a “cost of living crisis” and high inflation, the British government in the past week has begun sealing pay deals with trade union leaders to end repeated walkouts by train workers and nurses. Meanwhile, prospects for the economy are slightly less dim, and mild winter weather and state price caps meant people didn’t freeze despite gas shortages from the war in Ukraine. 

Strikes in some sectors are likely to rumble on, and Britain’s economic growth rate over the next few years is projected to be among the weakest among industrialized nations. But the country’s ability to avoid a severe recession after Russia’s invasion of Ukraine speaks to the wider, and unexpected, resilience of European economies to the war and energy crisis. 

Across the continent, growth has held up better than expected, inflation is set to fall and natural-gas prices fell sharply over the winter as warm weather and a stockpile of supply eased worries about shortages. 

While the outlook is less grim than a few months ago, it is hardly bright, especially in the U.K. The Organization for Economic Cooperation and Development recently said Britain would be the only major economy alongside Russia to see its economy shrink this year, though it upgraded its forecast to a slight contraction of 0.2% this year from a 0.4% decline in its November forecast. And real wages will still suffered their biggest one-year decline since records began in 1957, although experienced slightly less steep a fall than predicted months ago. 

Last year’s inflation surge prompted demands from a range of government workers for larger pay rises to limit their loss of spending power, which had already been eroded after years of state belt-tightening. The government declined to negotiate, saying it already had too much debt and arguing that bigger pay rises would help keep inflation high. 

The result of that standoff was a wave of winter strikes that revived memories of 1979’s “winter of discontent,” which opened the way for

Margaret Thatcher’s

election as prime minister. According to the Office of National Statistics, the number of working days lost to strikes peaked in December at 843,000, the highest monthly total since November 2011, but way below the number of days lost in the 1970s and 1980s, when strikes were much more common.   

This week, the government struck a deal to hand railway workers a 9% pay increase over two years. It also agreed to a deal with unions representing nurses, paramedics, midwives, security guards and cleaners to halt strikes and raise pay by 5% this year. Other government workers continue to plan for walkouts but officials are hopeful the deals can act as a template for other industrial disputes. 

“This rightly recognises the fantastic work our NHS workers like nurses, midwives and paramedics do, while also being affordable for the taxpayer,” said Prime Minister

Rishi Sunak

of the deal with some of Britain’s healthcare workers. 

The government won’t borrow or raise taxes to pay for its increased wage bill, so that means the money that goes to pay rises will leave less left over for other investments in the struggling state-run healthcare system, which may slow the process of cutting the long waiting times that have deprived the economy of workers and held back growth.  

“[The National Health Service has] already been asked to make quite big cost savings,” said Ben Zaranko, an economist at the Institute for Fiscal Studies, a non-partisan research body that focuses on government spending and taxation. “It will cause real headaches.”

The government has also argued that large pay rises would keep inflation high, but that claim is doubted by many economists. Government workers account for less than a fifth of the workforce, and even much larger pay increases would add little to overall demand for goods and services compared with the much bigger pay rises secured by workers in the private sector. 

The government says it is helping lower inflation through a series of measures that cap household energy bills, freeze planned rises in fuel taxes and changes to alcohol taxation. The budget watchdog estimated that would lower inflation by 0.7 percentage point in this fiscal year. 

—Tom Fairless in Frankfurt contributed to this article.

Write to Paul Hannon at [email protected] and Max Colchester at [email protected]

Though the increase was unexpected given recent declines, economists still foresee the pace of inflation falling sharply in months ahead, as the country’s overall economic picture improves. Declines in the pace of price increases are expected from April, with the independent budget watchdog last week forecasting that the inflation rate would end the year at 2.9%.

“It is likely that the trend from here will be sharply lower this year,” said Tom Stevenson, an investment director at Fidelity International. “The latest reading for the year to February is a hangover from the past year’s energy, fuel and food price hikes and tells us little about where inflation is heading from here.”

However, the February pickup in the core rate of inflation—which strips out food and energy—to 6.2% from 5.8% will be a concern for the Bank of England’s policy makers, who are set to announce their latest rate decision on Thursday.

The latest inflation figure makes an 11th rise in the BOE’s key interest rate more likely, economists say.

“The decision will hinge on whether policymakers believe the backward-looking inflation surprise is likely to be the start of a trend or whether it is a one-off linked to normal monthly volatility,” said

Kallum Pickering,

an economist at Berenberg Bank. 

The yield on 10-year U.K. government bonds rose after the release of the inflation figures, an indication that investors view a rate rise Thursday as more probable. Yields move inversely to prices.

The BOE had been confident that price rises would ease sharply over coming months, and last month forecast that inflation would fall to 3% by this time next year. 

April 2022 saw a big rise in home-energy prices as Russia’s invasion of Ukraine sparked fears of a shortage of natural gas. Since that likely won’t be repeated this year, the annual rate of inflation is set to drop sharply this April. Economists at JPMorgan expect the inflation rate will fall to 7.4% in April, and decline further from July, when household energy prices are likely to be falling. 

However, policy makers are worried that businesses will pass on their higher energy costs, and that workers will secure big pay rises that will pressure employers to raise their prices, which would extend the period of high inflation.

That is a concern shared by the European Central Bank. Speaking in Frankfurt, ECB President

Christine Lagarde

said the bank’s policy makers would focus on wages as it assesses the need for further rate rises.

“We are neither committed to raise further nor are we finished with hiking rates,” she said.

She warned that historically low unemployment in Europe could help unleash “a more prolonged cost-push shock coming from wage growth.”

Like the eurozone, the U.K. saw a pickup in food inflation during February as prices rose by 18.2% from a year earlier, according to the Office for National Statistics.  

“Food and non-alcoholic drink prices rose to their highest rate in over 45 years with particular increases for some salad and vegetable items as high energy costs and bad weather across parts of Europe led to shortages and rationing,” said

Grant Fitzner,

the ONS’s chief economist. 

Despite the rise in inflation in Britain, the country’s overall outlook is far less gloomy than it was entering the winter.

After some of the biggest strikes in decades, sparked by what is referred to in the U.K. as a “cost of living crisis” and high inflation, the British government in the past week has begun sealing pay deals with trade union leaders to end repeated walkouts by train workers and nurses. Meanwhile, prospects for the economy are slightly less dim, and mild winter weather and state price caps meant people didn’t freeze despite gas shortages from the war in Ukraine. 

Strikes in some sectors are likely to rumble on, and Britain’s economic growth rate over the next few years is projected to be among the weakest among industrialized nations. But the country’s ability to avoid a severe recession after Russia’s invasion of Ukraine speaks to the wider, and unexpected, resilience of European economies to the war and energy crisis. 

Across the continent, growth has held up better than expected, inflation is set to fall and natural-gas prices fell sharply over the winter as warm weather and a stockpile of supply eased worries about shortages. 

While the outlook is less grim than a few months ago, it is hardly bright, especially in the U.K. The Organization for Economic Cooperation and Development recently said Britain would be the only major economy alongside Russia to see its economy shrink this year, though it upgraded its forecast to a slight contraction of 0.2% this year from a 0.4% decline in its November forecast. And real wages will still suffered their biggest one-year decline since records began in 1957, although experienced slightly less steep a fall than predicted months ago. 

Last year’s inflation surge prompted demands from a range of government workers for larger pay rises to limit their loss of spending power, which had already been eroded after years of state belt-tightening. The government declined to negotiate, saying it already had too much debt and arguing that bigger pay rises would help keep inflation high. 

The result of that standoff was a wave of winter strikes that revived memories of 1979’s “winter of discontent,” which opened the way for

Margaret Thatcher’s

election as prime minister. According to the Office of National Statistics, the number of working days lost to strikes peaked in December at 843,000, the highest monthly total since November 2011, but way below the number of days lost in the 1970s and 1980s, when strikes were much more common.   

This week, the government struck a deal to hand railway workers a 9% pay increase over two years. It also agreed to a deal with unions representing nurses, paramedics, midwives, security guards and cleaners to halt strikes and raise pay by 5% this year. Other government workers continue to plan for walkouts but officials are hopeful the deals can act as a template for other industrial disputes. 

“This rightly recognises the fantastic work our NHS workers like nurses, midwives and paramedics do, while also being affordable for the taxpayer,” said Prime Minister

Rishi Sunak

of the deal with some of Britain’s healthcare workers. 

The government won’t borrow or raise taxes to pay for its increased wage bill, so that means the money that goes to pay rises will leave less left over for other investments in the struggling state-run healthcare system, which may slow the process of cutting the long waiting times that have deprived the economy of workers and held back growth.  

“[The National Health Service has] already been asked to make quite big cost savings,” said Ben Zaranko, an economist at the Institute for Fiscal Studies, a non-partisan research body that focuses on government spending and taxation. “It will cause real headaches.”

The government has also argued that large pay rises would keep inflation high, but that claim is doubted by many economists. Government workers account for less than a fifth of the workforce, and even much larger pay increases would add little to overall demand for goods and services compared with the much bigger pay rises secured by workers in the private sector. 

The government says it is helping lower inflation through a series of measures that cap household energy bills, freeze planned rises in fuel taxes and changes to alcohol taxation. The budget watchdog estimated that would lower inflation by 0.7 percentage point in this fiscal year. 

—Tom Fairless in Frankfurt contributed to this article.

Write to Paul Hannon at [email protected] and Max Colchester at [email protected]