U.K. Inflation Swings Upward, in a U-Turn

Britain’s inflation rate unexpectedly rose last month, reversing its recent downward trend and potentially undermining expectations that the Bank of England was close to halting interest rate increases.

Consumer prices in Britain rose 10.4 percent in February compared with a year earlier, the Office for National Statistics said on Wednesday. The rate had slowed for three consecutive months, to 10.1 percent in January after it peaked in October at 11.1 percent, the highest in more than four decades. The Bank of England’s rate-setters are scheduled to announce their next policy decision on Thursday.

On a monthly basis, prices rose 1 percent in February, the biggest jump since October. Higher prices in restaurants and hotels were the largest contributing factor, as alcohol prices were raised in pubs after discounts in January, according to the statistics agency. Food inflation continued to accelerate, with prices rising at an annual rate of 18 percent, from 16.7 percent in January.

“Food and nonalcoholic 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,” Grant Fitzner, the chief economist at the statistics agency, said in a statement.

The swing higher in inflation will come as an unwelcome intensification of Britain’s cost-of-living crisis. High household energy bills, wage growth that has lagged far behind inflation and more expensive food and other essential items have contributed to a steep decline in living standards. Earlier this month, the Office for Budget Responsibility, an independent fiscal watchdog, predicted that the inflation-adjusted decline in household disposable income this year and last year would be the biggest fall in living standards in records going back to the 1950s.

Even as wholesale energy prices, the biggest driver of inflation last year, have fallen, the central bank has been cautious about declaring any victory in its battle against inflation.

The Bank of England was the first major central bank to begin raising interest rates in December 2021, amid rapidly escalating energy prices. Since then, the central bank has raised rates by nearly 4 percentage points in an effort to stop high inflation becoming embedded in the economy. Policymakers have been particularly alert to higher services prices and signs that private sector wages were climbing rapidly, which would make it difficult to return inflation to the bank’s 2 percent target.

Recently, analysts had predicted that it could be the first major central bank to halt rate increases. Inflation is expected to slow substantially this year, with the annual rate falling to 4 percent by the end of the year, the Bank of England forecast.

Last month, Andrew Bailey, the central bank governor, said there had been a “turning of the corner” on inflation, but he cautioned that it was “very early days, and the risks are very large.” Still, policymakers have changed their language on the outlook for interest rates, removing the presumption that they would raised even higher. Instead, policymakers said “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” according to the minutes of the February policy meeting.

The data released on Wednesday shows how uncertain the inflation outlook remains. The annual rate of core inflation, a measure that strips out volatile energy and food prices and is used to gauge how deep inflation is in the economy, rose to 6.2 percent last month, from 5.8 percent in January. Services inflation jumped to 6.6 percent, from 6 percent in January.

This counters separate data published last week that would have brought some comfort to policymakers. That data showed the first slowing in wage growth since the end of 2021. Workers’ pay, excluding bonuses, rose at an annual rate of 6.5 percent in the three months to January, down from 6.7 percent in the three months to December, the statistics agency said.

As inflation appears to have peaked in many major economies, traders bet that central banks were close to their high point in interest rates. Two weeks ago, the Bank of Canada held its rate at 4.5 percent. It was the first time since January 2022 that it didn’t increase rates.

Since then, tumult at banks in the United States, particularly the collapse of Silicon Valley Bank, has complicated the choices central bankers face. The troubles in the banking sector have raised the prospect of policymakers being more cautious about pushing rates ever higher, not wanting to risk provoking a broader banking crisis.

The U.S. Federal Reserve sets interest rates later on Wednesday, with analysts split over whether it will continue raising interest rates.