Data from the Office for National Statistics (ONS) showed that in the UK consumer prices rose 10.1% in July year over year, beating the bank’s prediction of a 9.9% increase. This has traders in financial markets betting interest rates will double in the next six months as the Bank of England looks to tamp down rampant inflation.
Officials have already raised rates to 1.75% earlier this month, from 0.1% in December as they look to stop prices from rising.
Markets are now expecting the base rate to rise to between 3.5% and 3.75% by early 2023. It is expected to begin with another 0.5% hike next month.
Debapratim De, an economist at Deloitte said in a note, “We expect swift action from the Bank of England with the base rate potentially doubling by this time next year.”
The pound sterling fell 0.33% against the dollar and the euro, despite investors expecting the Bank to strictly tighten policy. Investors are worried the Bank’s aggressive moves may tip the economy into a worse recession than is already likely.
De added, “As the Bank moves aggressively to crush double-digit inflation, we are forecasting a 1.6pc contraction in activity between this autumn and the next. This is a much smaller contraction than the pandemic but, with a sharp squeeze on consumer spending power and likely rise in unemployment, will feel significantly disruptive.”
Two year government bond yields rose, hitting the highest level since November of 2008. The two and ten year split yield was the most inverted on record, at -17bps, a metric sometimes consistent with an impending recession.
Inflation is set to get worse across all sectors, as energy costs are poised to skyrocket to more than £3,500 from October once the price cap rises. Analysts are predicting it will trigger the biggest fall in living standards since records began in 1963.
Bank of America economists issued an analysis predicting inflation would peak at 14% in January, after another energy price cap rise.
Energy was the major driving force behind July’s inflation numbers, with one liter of gas costing approximately 43% more this year compared to the same time last year, and a liter of diesel costing 46% more.
