Unexpected Rise in Inflation Complicates Tomorrow’s MPC Decision

Pub. Date
22 March, 2023
Pub. Type

Main points

  • Annual consumer price inflation unexpectedly increased to 10.4 per cent in February from 10.1 per cent in January, following three consecutive months of falling inflation. This rise was driven by price increases in: restaurants and hotels - largely reflecting price rises in alcohol; food and non-alcoholic beverage - in part a consequence of vegetable shortages leading to increased prices; and clothing and footwear - which is an expected rise as new stock enters this time of year following the new year sales period.
  • Food inflation grew at an annual rate of 18.2 per cent in February, a significant rise from 16.7 per cent in January – the highest rate for this category observed in over 45 years. This is concerning since there is no government support to help households (especially lower income households, who spend a greater part of their incomes on food) offset this cost.
  • NIESR’s measure of underlying inflation, which excludes 5 per cent of the highest and lowest price changes, rose to a new series high of 9.7 per cent in February, after remaining flat at 9.0 per cent for three months. At the same time, the ONS’s measure of core inflation – CPI excluding food, energy, alcohol and tobacco – rose to 6.2 per cent in February from 5.8 per cent in January. These figures suggest that the increase in headline inflation is not a one-off movement, but rather reflects rising inflationary pressures.
  • NIESR’s measure of underlying inflation rose in each of the 12 UK regions. It is notable, however, that regional trimmed-mean inflation dispersion has risen for the first time since September 2022. For instance, the North of England experienced a trimmed-mean inflation rate of 10.31 per cent in February, while Northern Ireland experienced 8.67 per cent.
  • Market expectations, as implied by the most recent Overnight Index Swaps (OIS) curve, sees the Bank Rate peaking at 4.16 per cent in summer, notably lower than the 4.50 per cent expected at the time of last month’s tracker, following the recent spell of financial turbulence. This OIS curve implies that markets do not expect the MPC to raise rates further at tomorrow’s meeting, despite inflation remaining far above the 2 per cent target.

Annual CPI inflation rose unexpectedly to 10.4 in February from 10.1 per cent in January, driven by price increases in restaurants and hotels (mainly due to price rises in alcohol) and food and non-alcoholic beverages (in part due to price rises from vegetable shortages). Core inflation rose to 6.2 per cent in February from 5.8 per cent in January while NIESR’s measure of trimmed-mean inflation rose to 9.7 per cent in February from 9.0 per cent in January. Taken together, the data suggests that inflationary pressures in the economy have yet to be tamed. Despite these elevated figures, markets do not expect the MPC to raise its policy rate tomorrow in the wake of the current financial market turbulence. Given today’s data, and the expected effect of incoming wage rises on inflation in the coming months, we wonder if this would be a mistake.”

Paula Bejarano Carbo
Associate Economist, NIESR


For a breakdown of what inflation is and how it is calculated, read our blog post here and watch our video on inflation here.

See our previous tracker to follow the analysis.