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UK inflation remains in double digits as food prices keep rising

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Britain’s cost of living crisis is showing no sign of easing after new data showed UK inflation stuck above 10 per cent in March, making it more likely that the Bank of England will increase interest rates next month.

Stubbornly high “core inflation” has complicated Rishi Sunak’s efforts to turn around the economy, although headline inflation is still on course to halve by the end of the year, in line with the prime minister’s target.

Continued high inflation, driven by sharply rising food prices, will fuel demands by striking public sector unions for increased pay awards for 2023-24, something Sunak is determined to resist.

Jeremy Hunt said inflation above 10 per cent was destabilising for the economy.

“It is not a good place to be, ultimately it is dangerous if you leave it there,” the chancellor said during an event hosted by website Politico, adding that the tightness of the labour market was a “significant” factor in driving wage inflation.

UK inflation remained in double digits in March with annual price rises of 10.1 per cent. Consumer price inflation, which was 10.4 per cent in February, had been expected to drop to 9.8 per cent last month.

Although petrol and diesel prices fell, further sharp rises in the costs of food, recreation and culture — a broad category that includes theatre, concerts and sporting events — left the index higher than anticipated. Food prices alone rose 19.1 per cent in the year to March.

The BoE is watching these figures very closely as they are the last significant data release before its next meeting in May. Officials had hoped to see the first signs of a significant drop in inflationary pressure, but core inflation — excluding food and energy prices — remained unchanged at 6.2 per cent.

Sterling strengthened, with the pound up 0.3 per cent against the dollar at $1.24 on Wednesday.

Rachel Reeves, Labour’s shadow chancellor, said: “The reality is that under the Tories our economy is weaker, prices are out of control and never have people paid so much to get so little in return.”

Grant Fitzner, chief economist of the ONS, said falling motor fuel prices “were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high”.

The drop in headline inflation was almost entirely caused by motor fuels, with the average price of a litre of petrol falling from about £1.60 in March 2022 to just under £1.47 last month. Offsetting this and keeping the headline rate high were soaring food prices, especially of bread and cereals.

The stubbornly high inflation rate will provide little comfort for the BoE’s Monetary Policy Committee, which has been looking for signs that underlying inflationary pressure is moderating and that declines in the headline rate are not caused solely by lower energy prices.

The MPC has said it would raise interest rates again from the current 4.25 per cent level “if there were to be evidence of more persistent pressures”.

Kitty Ussher, chief economist at the Institute of Directors, said the failure to see any drop in core inflation would require the bank to take action and raise rates again on May 11. “Taken together with yesterday’s strong labour market data, it is now clear that there is more demand in the economy than the Bank of England had expected in the first quarter.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the fall in the headline rate had been “too modest for the MPC to stop raising rates”.

Capital Economics, a consultancy group, said the stubbornness of high inflation raised the possibility that a rise in interest rates to 4.5 per cent at the May meeting may not be the last.

UK inflation has not been falling as quickly as comparable indicators in many European countries, where lower energy prices were reflected in the March data. But headline rates for the UK are expected to drop significantly next month.

With gas and electricity prices for April already known, the annual increase in this component will fall from 96 per cent to 27 per cent, although consumers will not feel better off as the energy price cap will stay at the same level. These prices are expected to start falling in the summer.

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