The consumer price index rose by 4.2 per cent in the 12 months to October this year, an increase from the 3.1 per cent seen in September.
The rising rate of inflation, which has exceeded the Bank of England's target of 2 per cent since May this year and is now at its highest level since December 2011, has increased the pressure on the central bank to raise interest rates.
The rise, ahead of expectations of 3.9 per cent, was driven by household energy bills, fuel prices and rising hospitality costs.
Chancellor of the exchequer Rishi Sunak said: “Many countries are experiencing higher inflation as we recover from Covid, and we know people are facing pressures with the cost of living, which is why we are taking action worth more than £4.2bn to help them."
But investment analysts remain split on the best route forward for the BoE, highlighting the precarious decision facing the monetary policy committee.
Daniel Casali, chief investment strategist at Tilney Smith & Williamson, said the central bank’s decision not to raise rates earlier this month has already impacted inflation.
He said: “The BoE will be aware that when it failed to raise interest rates at its November 4 meeting it weakened sterling and created another source of inflation through higher import prices.
“The BoE may be reluctant to make the same mistake again when the monetary policy committee meets next on December 16."
But Richard Carter, head of fixed interest research at Quilter Cheviot, said he was unsure if a rate hike would solve the problem of soaring inflation.
“Some may say that the heightened inflation is evidence that the BoE should have acted already and started the process of tightening monetary policy,” he said.
“But really what’s causing the heightened price increases in the energy market is a perfect storm of factors that are all feeding through at the same time. It’s not clear how a modest 0.15bps rate hike would have any impact on the heightened prices in the electricity and gas market.
"Normal monetary levers might not be effective.”
'Undoing great strides'
Many highlighted the detrimental impact this would have on those with limited incomes as well as pensioners with fixed incomes.
Andrew Tully, technical director at Canada Life, said the rise in inflation was another damaging blow to households who had been struggling to balance the books in the face of soaring prices.
“Not only will this have an effect on those pensioners with fixed incomes who will see their spending power continue to fall. We could also see people start to deprioritise their pension saving as wages are made to stretch further to cover rising costs.
“If inflation continues to grow unchecked we could start to see the undoing of some of the great strides forward made by auto-enrolment.”
Becky O’Connor, head of pensions and savings at Interactive Investor, said those dependent on the state pension would find it harder to afford essential items.
The state pension will rise next year by 3.1 per cent, the figure of inflation in September, after the wages element of the triple lock guarantee was suspended to avoid disproportionate rises following the pandemic.
Pensions would have increased by 8.3 per cent had the triple lock not been suspended.
O’Connor said: “For savers, higher inflation erodes savings to the point where it becomes hard to justify keeping anything but the minimum in an emergency savings account if you don’t want to lose the value of your savings in real terms. Inflation is now more than four times higher than the interest rates paid on easy access savings accounts.
“A rise in interest rates to combat inflation feels inevitable and it will need to be effective in countering the pressures that are driving price rises relatively quickly to prevent more difficulties for struggling households.”
Earlier this week, BoE governor Andrew Bailey told MPs the MPC was waiting for more data from the labour market before they would make a decision on interest rates.
Yesterday (November 16) that data was published, and the likelihood of a rise in interest rates next month was seen to have increased after the figures from the Office for National Statistics showed a rise in employment levels after the end of the furlough regime.
sally.hickey@ft.com
