UK inflation rate soars to 30-year high as cost pressures continue

Shoppers walk along Oxford Street in London.

The U.K. inflation rate hit a 30-year high in December as higher energy costs and supply chain issues continued to drive up consumer prices.

Inflation hit an annual 5.4%, its highest since March 1992 and up from 5.1% in November, itself a decade high. The economists were expecting an increase of 5.2%.

Consumer prices rose in line with expectations on a monthly basis.

The Bank of England is expected to raise interest rates again because of the rising cost of living. The first major central bank to begin lifting borrowing costs from their lows was the BOE.

The Monetary Policy Committee is expected to raise the rate again in February, after hiking it by 15 basis points in December.

The Bank is operating in a tight labor market with vacancies at a record high and employment still below its pre-pandemic level.

The December print vindicated the Bank of England's decision to hike rates, but February's meeting could still go either way, according to Paul Craig, portfolio manager at Quilter Investors.

He said that the monetary policy committee would be faced with a difficult trade-off between ensuring financial stability or helping households cope with a cost of living crisis that will squeeze household finances over a difficult winter period.

Wage increases may not be enough to cover the cost of returning to normal, as the cost of living is increasing, so is the cost of going to work.

The Office for National Statistics published figures on Tuesday which showed wage growth at 3.8% in December, indicating that workers are facing a real-terms pay decline, and Craig suggested there is now a "very real concern" that in-work poverty is growing.

The ONS said that the Consumer Prices Index, which includes owner occupiers' housing costs, rose by 4.8% in the 12 months to December, the highest since September 2008. Housing and household services were the largest contributors.

The Bank of England would be uncomfortable with the upside surprises to the headline and core inflation readings.

There is no doubt that prices are being boosted by factors that should moderate in time, including surging energy costs and supply chain problems.

Consumers are going to feel the pinch as price increases may get worse before they get better, particularly with the energy price cap set to increase by about 50% in April.

Wage gains will help ease the pinch from rising prices but could end up fueling a period of above target inflation.