News & Analysis

Headline inflation rose by 0.7 percentage points in February to print at 6.2% YoY, a thirty-year high, while the core rate rose 0.8 percentage points to sit at 5.2%. Both measures outstripped expectations by two-tenths of a percent, and by doing so, provided the pound with a limited boost this morning.

With inflation tracking higher at a faster rate than economists expect and set to reach an initial peak in April above 8% before potentially rising again in October when the Ofgem energy cap is readjusted, the focus sits squarely on the Bank of England and policymakers’ response to the recent inflationary shock. While the BoE embarked on a dovish hike in March, with one member voting to hold rates under the premise that rising inflation could ultimately tackle high inflation by restricting demand pressures, the need to continue raising rates to mitigate the second-round effects from the inflation shock continues to be displayed within the CPI data. February’s report showed the pace of price growth jump by 0.8% MoM in February, the largest monthly gain between the two months since January and February 2009.

For the pound, the initial rally after the data has already faded, but it could be reignited following this afternoon’s spring budget announcement.

Should fiscal policy even partially offset the growth impact of the latest inflationary shock stemming from the war in Ukraine, the path will be clearer for the BoE to continue raising rates throughout the course of the year.

Headline inflation data is already supportive of continued policy tightening by the Bank of England. However, dovish policymakers will argue that the tools at their disposal have limited effects on bringing down global commodity prices and policy should focus on inflation expectations and second-round effects. Despite housing and household services providing the largest upwards contribution to annual headline inflation in February, largely due to rising energy costs, the signs are becoming apparent of price pressures broadening, even before the war in Ukraine broke out. While in year-on-year terms, housing and household services provided the largest upwards contribution, on a monthly basis, most of the inflation surge in February was driven by recreation and culture and clothing and footwear.

With price pressures now broadening from categories directly related to global energy prices to consumer discretionary goods, of which prices are more elastic to demand, the case for sustained policy tightening by the BoE is mounting and could be consolidated in March’s data should price pressures in the core-CPI basket remain.

Within the data, household services contributed 1.01% to headline year-on-year CPI, while transport contributed 1.57%. Outside of the energy-intensive categories, clothing and footwear added 0.68%, recreation and culture contributed 0.67%, and food and non-alcoholic beverages added 0.58%. On a monthly basis, however, the largest upwards contribution to the headline rate came from recreation and culture, at 0.25%, and clothing and footwear at 0.17%.

Price pressures broadened in February as core-CPI continued to track higher



Simon Harvey, Head of FX Analysis


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