The UK's inflation hit a nearly 30-year record in December, economists: the peak could be in April

UK inflation indicators are once again higher than expected. Data released by the Office for National Statistics showed that the Uk's Consumer Price Index (CPI) rose 5.4% year-on-year in December, the highest in nearly 30 years. This is not only higher than the previous 5.1%, but also more than the 5.2% expected by economists. Affected by this, the UK 10-year yield rose 3.9 basis points to 1.256%, close to its highest level since 2019. The pound's exchange rate against the euro is also approaching its highest value since 2016.

Fiona Cincotta, a senior analyst at Jia Sheng Group, said in an interview with the first financial reporter that the higher inflation rate in the UK has increased the cost of living of the people in the country, which will drag down the consumption expenditure of the country's residents. Against the backdrop of a better UK job market and a hardline stance on the Part of the Bank of England, the Bank of England is expected to raise rates again in February.

Food prices hit the biggest year-on-year increase in 8 years

The Uk's Office for National Statistics said the country's inflation rate was rising, on the one hand, still due to rising energy costs. In December, electricity and gas bills in the UK rose by 18.8% and 28.1% year-on-year, the biggest increase since 2009. In addition, another driver of high inflation comes from the rise in the prices of food and non-alcoholic beverages, household goods and other commodities. Among them, the year-on-year increase in food prices reached 4.2%, the largest increase in 8 years.

Jack Leslie, senior economist at the Research Foundation, a think tank, said the drivers of inflation are becoming more widespread. The increase in commodity prices by food and FMCG companies is the main reason for the high inflation in the UK.

Procter & Gamble, the world's largest FMCG, raised prices three times in 2021. Companies such as Coca-Cola and Unilever have also announced price increase plans. "While inflation may be temporary, price increases for commodities are necessary." Nestlé CEO Mark Schneider said.

According to the Food and Agriculture Organization of the United Nations (FAO), global food prices reached their highest level in 10 years in 2021, up 28 percent from 2020 prices. Not only that, international orange juice and coffee prices have also climbed to a new high in the past 10 years. According to market research firm Factset, U.S. frozen concentrated orange juice futures prices have risen about 50 percent since the pandemic. Data from the Intercontinental Exchange (ICE) in the United States shows that international coffee futures prices will rise by more than 90% in 2021.

Xie Wen, a senior analyst at Zhongda Futures, said in an interview with the first financial reporter that the reason for the soaring prices of upstream agricultural products is mainly disturbed by extreme weather, rising energy prices and supply bottlenecks, resulting in too little supply of agricultural products.

The latest USDA report lowers global soybean and corn production forecasts for 2021-2022 to 373 million tonnes and 1.207 billion tonnes, respectively. The agency also said it expects Florida's orange production to hit its worst harvest since 1945.

Brazilian market research firm Conab said that brazilian Arabica coffee bean production in 2021 hit a new low in 2009.

At the same time, the above-mentioned food companies also said that another reason for raising commodity prices is that since the demand for food is just needed, and European consumers are more loyal to the brand, they have not seen much change in the demand side since the outbreak of the epidemic. Nestlé's earnings report shows that in the first nine months of 2021, the company's total sales increased by 2.2% year-on-year to CHF 63.3 billion. At the same time, the company also raised its full-year sales forecast for two consecutive quarters, because consumers are more willing to drink more and better coffee at home during the epidemic.

Inflation peaked in April?

Bloomberg economist Dan Hanson said: "As energy prices take longer to fall, the high inflation is expected to continue, and the peak may come in April, when the energy surge will push the UK inflation rate to around 6.5%." Alpesh Paleja, chief economist at the British Industrial Union (CBI), britain's largest employers' organisation, agrees that the country's rising inflation rate shows no signs of ending.

At the same time, Paleha also reminded: "As prices rise and real wages fall, the pressure on British families will increase day by day." A data released by the British government on the 18th showed that from September to November last year, the growth rate of people's wages in the country only increased by 3.8% year-on-year, indicating that the growth rate of wage income of the people in the country was slower than the growth rate of inflation.

Zinkota believes that the Probability of the Bank of England continuing to raise interest rates is relatively large. The first reason is that high inflation in the UK and wage growth that is not as fast as inflation will drag down the consumption of the country's residents, which will hinder the country's economic growth. The CBI expects household spending to drive 90 percent of the country's economic growth in 2022 and two-thirds of the country in 2023 as exports remain weak.

She also said that another consideration for monetary policy is employment, while the UK labor market has gradually picked up. According to the Uk's Office for National Statistics, the number of new business jobs in the country reached 184,000 in December, a higher-than-expected increase. The UK's three-month ILO (by ILO standards) unemployment rate fell to 4.1% in the three months to November last year, the lowest level since June 2020.

In this context, the Bank of England is likely to raise interest rates at least three times in 2022, 25 basis points in February, May and November, Hinkota believes, given the fact that the BoE's response at the December Monetary Policy Committee meeting has been relatively hawky.

"However, there are still significant risks to the UK economy, especially taking into account the recurrence of the outbreak." "If the Olmikron strain causes another large-scale infection in the UK, the uk's hospitals are heavily loaded and the Bank of England is likely to keep interest rates unchanged in February," Zinkota said. But if the Olmikron strain is seen as a driver of inflation and wage growth, the Bank of England risks further rate hikes in March. ”

According to data from the British Department of Health and Social Security, as of the 19th, the number of new confirmed cases of new coronary pneumonia in the country exceeded 100,000 in a single day, and the cumulative number of confirmed cases exceeded 15.5 million.

British Prime Minister Johnson announced on the 19th that the country will end the previous epidemic prevention plan against the Olmiqueron strain next week. From next week, people will no longer be required to wear masks or work from home in England, and COVID-19 vaccination certificates will no longer be mandatory to enter gathering places.