Annual CPI inflation has increased from 2.5% in December to 3% in January - above economists' forecasts of 2.8%.
Inflation had dipped from 2.6% in November, however economic experts predicted continued fluctuation in the rate of CPI. The Bank of England is forecasting that inflation will peak at 3.7% this year.
Core inflation, which strips out volatile factors like energy and food costs, jumped from 3.2% in December to 3.7% in January.
Industry experts are now split on what the figure means for the future path of Bank Rate, with some saying the rise was expected due to one off factors such as energy prices and private school fees, and others warning that the chances of March base rate cut have now evaporated.
Russell Gous, editor-in-chief of TopMoneyCompare, explained: “Markets will be watching closely to see how this affects the Bank of England’s interest rate outlook. While the increase is largely driven by services inflation, particularly fuel prices and private school fees, the broader concern is whether this signals a longer-lasting trend rather than a temporary spike."
"Rate cut next month is decidedly off the table"
Many industry commentators expressed concerns about the higher-than-expected inflation figures, despite Andrew Bailey attempting to reassure markets yesterday, stating that the recent resurgence in inflation is “not telling us a story about the fundamental state of the economy.”
Lindsay James, investment strategist at Quilter Investors, noted that markets are "sceptical about the prospect of further rate cuts in the UK before May, pricing in less than two quarter-point cuts for the year as a whole".
Peter Stimson, head of product at MPowered Mortgages, commented: “Optimists have been quick to point out that much of the painful surge in CPI is down to one-off factors like the introduction of VAT on school fees in January and the annual increase in rail and bus fares.
“But even the most indulgent reader of this data has to admit that hopes of an imminent interest rate cut have been dashed.
“For all its desire to support the UK’s stagnant economy, the Bank of England’s day job is to get CPI down to 2% and keep it there. At 3%, CPI is now way off target and there is plenty of scope for further inflationary pressure.
“Core inflation, which strips out volatile factors like energy and food costs, jumped from 3.2% in December to 3.7% in January. Workers’ real wages are now rising at the fastest pace in over three years, and inflation in the UK’s vast services sector, which accounts for four fifths of the economy, is now running at 5%.
“With energy prices set to rise in coming months and employers now barely a month away from the jump in their wage bills triggered by the increase in National Insurance, the potential for inflation to keep rising is significant.
“Against that backdrop, the chances of the Bank of England cutting its base rate again in March have all but evaporated. It will have little choice but to leave rates alone in a bid to get inflation under control."
Derrick Dunne, CEO of YOU Asset Management, agreed: "With inflation and wages rising so sharply, the prospect of a rate cut at the forthcoming Monetary Policy Committee (MPC) meeting in March now appears decidedly off the table.
"Looking ahead, we expect inflation to continue its upward trend in the coming months, largely driven by rising energy bills.
"While there remains a possibility that the MPC will reduce borrowing costs in May, that is becoming a more distant prospect. Unless we see an unexpected moderation in inflation and wage growth, early summer now seems to be the most probable window for the Bank of England to consider acting.
Nicholas Hyett, investment manager at Wealth Club, added: "If there was any doubt about what the Bank of England would do at its March interest rate meeting there isn’t now. Headline inflation has jumped significantly, and came in some way ahead of market expectations.
Higher prices for motor fuels and airfares have pushed up transport costs, while food and non-alcoholic drinks saw prices rise 3.3% year-on-year. Both will increase the squeeze on working households, as will the rise in council tax, which has seen owner occupiers' housing costs rocket by 8% in 12 months.
Making matters worse is the substantial uptick in Core inflation – which strips out food and energy prices and is considered a better measure of domestically generated inflation. With Core inflation nearly twice the Bank of England’s target we see little chance the Bank starts cutting rates again any time soon.”
"Inflation remains in line with Bank of England projections"
However, others were more upbeat about today's inflation figures and the prospect of further rate cuts in 2025.
Rob Morgan, chief investment analyst at Charles Stanley, believes that accelerating inflation "won't stand in the way of rate cuts". He said: "With just two cuts last year and economic pressures mounting, we believe a balance of policymakers will decide it is appropriate to take a further 0.25% slice off interest rates from 4.75% to 4.5% at the next meeting in February. If anything, the recent tightening in financial conditions, which pose clear downside risks to the UK economic outlook, reinforce the case for BoE easing in the spring too. Further reassuring inflation numbers would also serve to point the committee in that direction."
George Lagarias, chief economist at Forvis Mazars, commented: “Inflation returning to 3% should, oddly, not be too alarming. The Bank of England tends to dismiss energy and food cost spikes, which contributed the most towards price rises, and prefers to monitor the more “sticky” parts of inflation, like wages. Yesterday, despite higher wages, Andrew Bailey was optimistic about containing wage growth going forward. If food and energy price spikes don’t repeat too often, which would suggest a problem in supply chains due to global policy uncertainty, then last month’s inflation number will likely not deter the BoE from cutting rates going forward."
John Phillips, CEO of Just Mortgages and Spicerhaart, took a balanced view, concluding: “We have to be realistic and acknowledge that inflation is likely to remain a persistent challenge this year, particularly with geopolitical tensions escalating, higher energy prices later in the year and as we see the full effects of government policy, such as the national insurance hike. We also have the elephant in the room and the upcoming Spring Statement at the end of March.
“All along though, the central bank has maintained that it will push forward with multiple base rate cuts this year, as it balances sticky inflation with an economy showing minimal growth. Whether today’s bigger rise in inflation changes that trajectory is yet to be seen."
