The UK’s consumer prices index (CPI) rose to 5.1% last month, hitting its highest level in a decade.

Up from 4.2% in October, and far exceeding its 4.7% forecast, UK inflation has not been this high since September 2011.

The new data, published today by the Office for National Statistics (ONS), is expected to put further pressure on the Bank of England (BoE) to raise the benchmark interest rate.

As reported by Trade Finance Global, the BoE has not raised interest rates since August 2018 – a policy that has left many economists puzzled against a backdrop of rising inflation.

Such issues will once again be in the spotlight tomorrow, when the BoE’s Monetary Policy Committee (MPC) will vote on raising the benchmark interest rate from a record low of 0.1%, where it has been since March 2020.

Already, institutions such as the International Monetary Fund (IMF) have started to highlight the danger that the UK economy faces from persistently high inflation prints.

Speaking today at a forum on the UK’s financial situation, Kristalina Georgieva, managing director of the IMF, warned that even higher inflation is in store for the UK, and cautioned the BoE against inaction on raising rates.

“The Bank of England needs to calibrate the response, taking into account both pressures coming from inflation and the necessity to make sure that it is not cold water thrown on growth,” she said.

“I have high confidence that the Bank of England will take the appropriate steps in that regard, and that over the next year, after peaking at 5.5%, inflation would recede.”

Food, fuel, fashion – all going for a premium

In an overview of its main findings from last month’s inflation data, the ONS said the 12-month growth rate in prices for discretionary items was 5.2%, while for non-discretionary items it was 4.1%.

Grant Fitzner, chief economist at the ONS, said: “Clothing costs – which increased after falling this time last year – along with price rises for food, second-hand cars, and increased tobacco duty all helped drive up inflation this month.”

He added: “The costs of goods produced by factories and the price of raw materials have continued to increase significantly to their highest rate for at least 12 years.”

The ONS said that energy and transport are the biggest drivers of price movements in the non-discretionary category, while discretionary inflation is generally more broad-based.

Moreover, lower-income households typically spend a higher proportion of their income on non-discretionary items compared with higher-income households.

Looking back at almost two decades of data, the ONS also said that, since January 2005, prices for non-discretionary items have risen by around 49%, while prices for discretionary items have risen by around 41%.

Homeowners squeezed despite record low interest rates

The UK’s CPIH – a measure of CPI including owner occupiers’ housing costs – grew 4.6% in the year to November 2021, despite almost an entire year of record low interest rates.

As noted by the ONS, this was up from 3.8% growth in the year to October, and it is also the highest annual CPIH inflation rate since September 2008.

Suren Thiru, head of economics at the British Chamber of Commerce (BCC), said it is “concerning” that inflation is outpacing wages, and that if this disparity continues to increase, real household incomes will be squeezed further, weakening overall economic activity.

“Stronger growth in producer prices points to an acceleration of cost pressures in supply chains, indicating that inflation will drift higher over the coming months,” said Thiru.

“Inflationary pressures are expected to intensify in the near-term as the rising cost of imported raw materials, higher energy prices, and the reversal of the VAT reduction for hospitality and tourism drives inflation materially higher by the middle of 2022.”

Thiru also noted that Omicron could accelerate the current surge in inflation, if restrictions in the UK and overseas to combat the new variant trigger more supply chain disruption.

“Despite surging inflation, a December interest rate rise remains improbable given concerns over Omicron,” he said.

“While rates will rise sooner rather than later, with the current inflationary spike mostly driven by global supply constraints and price pressures, higher rates will do little to curb further price rises.

“Greater support is immediately needed for those businesses impacted by Plan B, including making additional grant funding available and reverting the VAT for hospitality and tourism back to its emergency rate of 5%.”

UPDATE: This article was updated on 16 December 2021 to reflect comments made by IMF Managing Director Kristalina Georgieva.