UK inflation hit 5.4% in December, exceeding economists’ fears and prompting worries of a cost-of-living crisis.
With the price of most goods and services increasing, inflation was at its highest since March 1992 and is expected to push towards 6% this year with rising energy prices in the pipeline.
Across the board
The ONS figures show broad rises in food, restaurant bills, hotels, furniture, household goods, clothing and footwear in the run-up to Christmas.
Kitty Ussher, chief economist at the Institute of Directors, told the FT:
“What is of particular concern is that the change [in inflation] from November has come mainly from an increase in the price of food. Not only does this provide additional evidence that inflation is becoming endemic rather than transitory, it also bodes ill for households facing multiple rises in the cost of living this spring.”
Market reaction
Sharecast reports that London stocks fell following the news, with the FTSE 100 down 0.3% at 7,544.48.
Pound Sterling hasn’t been overly impacted, however, making modest gains against the US dollar, reaching a value of US$1.3618, according to Daily FX.
If inflation were to lead to a decline for Sterling, this could make British exports more attractive in international markets.
Interest rates
According to the Guardian, the inflation figures put pressure on the Bank of England to push up interest rates.
It increased its base interest rate from 0.1% to 0.25% in December and is expected to make a further increase to 0.5% in February. Some analysts expect further rises this year to take the base rate above 1%.
Inflationary effect
Rising inflation can increase the cost of goods produced in the UK because of risen costs buying components or parts as well as creating pressure on firms to increase wages for staff.
At the same time, imports could become more attractive to UK consumers if overseas seller prices do not rise at the same rate as UK prices.
However, inflation is affecting many countries. In Germany, it has also hit a 30-year high at 3.1% according to the Express.
Shipping
For traders, it looks as if the cost of shipping is set to remain high in 2022, reports the Economic Times.
A 40-foot container from Asia to the US cost more than $20,000 last year – ten times the pre-pandemic level – and economists warn that persistently high transportation prices are stoking inflation and clouding the recovery.
Research by Nicholas Sly, an economist with the Kansas City Fed, found, that a 15% increase in shipping costs led to a 0.10 percentage point increase in core inflation after one year.