Inflation rises to 41-year high of 11.1%

CPI inflation jumped to an annual rate of 11.1% in October, from 10.1% in September, according to data released this morning from the ONS.

October's inflation rate was higher than the consensus expectation among analysts of 10.7% and the ONS believes inflation is now at its highest rate since October 1981.

Housing and household services, which includes household gas and electricity, rose 11.7%, while food and non-alcoholic beverage prices rose 16.4%.

The monthly increase in CPI was 2.0% compared to the 1.1% increase in September.

Despite the introduction of the government's Energy Price Guarantee, gas and electricity prices made the largest upward contribution to the change in the monthly CPI inflation rate between September and October. Households are now paying 88.9% more for gas and electricity than a year ago.

Rob Clarry, investment strategist at Evelyn Partners, said: "Despite this challenging headline figure, we do still expect inflation to ease into next year. This is likely to be driven by three main factors. First, the base effects will be more favourable, with annual comparisons made against months at the start of 2022 when prices were already surging. Second, we are starting to see the impact of higher interest rates feed through into the real economy, which will slow demand for goods and services. Third, the tightness we have seen in the UK labour market is starting to show some signs of easing. The UK unemployment rate increased from 3.5% to 3.6% this week and the number of job vacancies fell in the three months to October.

"Financial markets had been expecting the Bank of England to raise interest rates by 50 bps at their next meeting on 15 December. While the expected peak in UK interest rates had lowered recently after the Governor of the Bank of England, Andrew Bailey, suggested that market expectations were too lofty, overshoots like this will only raise suspicions that inflation could remain sticky. The overnight index swap market had been pricing in a peak of around 4.5% instead of the 6% we saw in September, but this could rise after today’s reading.

"Markets will now look to tomorrow’s Autumn Statement for further signs of where the UK economy is heading. The Chancellor faces the unenviable task of trying to avoid a recession while also restraining public spending. Tighten fiscal policy too much and he runs the risk of deepening the impending recession. But too little could well alarm gilt investors and prompt another sell-off.

"We can also expect to receive more details on future energy support following the governments’ decision to end universal support on energy bills in April 2023, instead of October 2024. The level of support will be important in determining whether we see another inflationary spike next Spring."

James Bentley, director of Financial Markets Online, commented: “Inflation is still out of control in the UK, raising the prospect of more aggressive action by the Bank of England. Market expectations were some distance from reality on this occasion and the pace of price rises in October was also streets ahead of where it was in September.

“A 40-year high appearing this late into the rate hiking cycle is a big surprise and potentially terrible news for borrowers. Only a fortnight ago Andrew Bailey was attempting to calm market nerves and encourage lenders not to go over the top in raising mortgage rates. Some may say that now looks a bit premature. With a jump like this, a sizeable interest rate rise is almost inevitable next time the MPC meets, no matter what policymakers would prefer.

“Such strong inflation also raises the spectre that, if the Bank hikes rates more quickly, the recession the UK is probably already experiencing will be deeper and longer. This is going to give consumers and investors a lot to think about.

“The only silver lining is that, with inflation coming down in the US, the pound may fare better against the dollar. For now though, inflation is threatening to drive a wedge between the monetary policy approaches being adopted on either side of the Atlantic.”

Simon Webb, managing director of capital markets and finance at LiveMore, added: “The spiralling cost of energy and food are the main components of the high inflation we have today. What appears to be a foregone conclusion, judging by the recent 0.2% downturn in GDP, is that the UK is moving into recession along with other global economies. This should have the effect of bringing inflation down, however, there are still global shortages of food, with Russia’s invasion of Ukraine being a large contributory factor.

“What is notable about the CPI inflation figure is that it has been calculated using subsidised energy prices, so the 11.1% rate is lower than if there was no energy price cap in place. This cap is due to be removed, or reviewed, in April 2023 but if it is taken away, inflation may well will pick up again. It could be a roller coaster ride for inflation in the next year.”