Investment Institute
Market Alerts

UK Reaction: Inflation heats up

  • 22 March 2023 (3 min read)

• Consumer Price Index (CPI) inflation rose unexpectedly to 10.4% in February up from 10.1% in January, driven by increases in restaurant and food prices. This reading came above consensus estimates of an easing to 9.9%.

• Core CPI rose to 6.2%, above consensus estimates of the rate easing to 5.7% driven by  continued increases in core services on the month as core goods continue to ease.

• The sharp reacceleration of inflation is unlikely to persist as sharp increases in energy seen last year drop out of the headline, but signals the real risk of inflation remains sticky on its descent particularly as the labour market remains tight.

• We look for a 25 basis points (bp) hike by the Monetary Policy Committee (MPC) tomorrow, risks of a temporary pause remain, but today's data particularly the reacceleration of core and services CPI underscore the challenge that the MPC faces in returning inflation to target. 


Consumer Price Index (CPI) inflation rose to 10.4% year-on-year (y/y) in February up from 10.1% in January, by increases in restaurants and hotels and food prices. This reading came well above consensus and the Bank of England (BoE) estimates of inflation easing to 9.9%. Core CPI inflation rose 40bp to 6.2%, above consensus estimates of a slight decline to 5.7%. Retail Price Index (RPI) inflation rose to 13.8% whilst Retail Price Index excluding mortgage interest payments (RPIX) rose to 12.9%.

The rise in inflation was driven by a sharp acceleration in restaurants and hotels and food inflation. Of the 0.3 percentage point (ppt) increase in CPI between February and January, increases in restaurants and hotels contributed 0.2ppt to the rise, with the annual rate rising to 12.1% as restaurants and cafes hiked alcohol prices. Increases in food prices contributed 0.15ppt with food inflation in CPI increasing by 2.1% on the month leaving the annual rate at a staggering 18% – the highest annual rate in around 45 years. British Retail Consortium shop prices rose to a record high in February and whilst input prices have begun to show signs of easing the risk remains that food inflation could push higher in coming months. Increases in clothing prices also contributed to the rise (+0.1ppt). These increases were marginally offset by declines in recreation and culture (-0.1ppt).

Both core and services CPI which most closely reflect domestic inflationary pressures and are closely watched by the MPC rose on the month; services CPI rose to 6.6% following last month’s sharp decline and core CPI was pushed higher by increases in core services.

The sharp reacceleration of inflation is unlikely to persist as goods price inflation continues to decline but signals the real risk of inflation remaining sticky on its descent. Inflation is likely to fall in the coming months as sharp increases in fuel and household energy prices seen last year drop out of the headline. However, whilst the labour market remains tight, we continue to see risks to inflation as skewed to the upside. We forecast CPI inflation to average 6.0% this year and 2.3% next year (up from 5.8% and 2.2% respectively).

We look for a 25bp hike from the MPC at their March meeting tomorrow. Clearly, the market backdrop and challenges in the banking sector adds uncertainty, and we think there is a real risk the BoE pauses before resuming hiking in May. But on balance we expect the BoE to remain on course, and the strength of today’s inflation print underscore the risk of persistent inflationary pressures in the economy. We expect the MPC to pause their hiking cycle at 4.25%, pencilling in cuts to Bank Rate beginning in Q4 2022 with 25bp cuts each quarter out to end 2024, bringing Bank rate to 3%.

As markets await today’s decision from the Federal Reserve, the reacceleration in inflation has driven a hawkish shift in BoE rate expectations. The pound rose sharply against the dollar, appreciating by 0.4% currently trading around $1.228. The pound also made gains against the euro appreciating by 0.3%. 


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