UK records western Europe's highest inflation as March fall disappoints

Britain was the only country in western Europe with double-digit inflation in March after it fell less than expected, official data showed on Wednesday, bolstering bets that the Bank of England will raise interest rates again in May.

Consumer price inflation (CPI) dropped to an annual rate of 10.1per cent, the Office for National Statistics (ONS) said, down from 10.4per cent in February but well above the 9.8per cent forecast by economists polled by Reuters and the 9.2per cent predicted by the BoE in February.

Inflation, which hit a 41-year high of 11.1per cent in October, continued to eat into the spending power of workers whose pay is rising by less.

Prices for food and non-alcoholic drinks were 19.1per cent higher in March than a year earlier - the biggest such increase since August 1977 - which the ONS said reflected higher costs for biscuits and cakes, and to a lesser extent chocolate and fruit. Milk and sugar cost around 40per cent more than a year ago.

Britain's headline inflation rate is now the highest in western Europe and compares with an average of 6.9per cent in the eurozone and 5.0per cent in the United States. Austria recorded a higher inflation rate than Britain in February.

The reading underlined expectations that Britain will suffer high inflation for longer than its peers due to its reliance on natural gas for heating and electricity, and the structure of government subsidies that smoothed out price changes.

The Bank of England also worries that high inflation might lead to a lasting upward shift in wage demands and businesses' pricing strategies, exacerbated by a post-pandemic reduction in its labour force and trade and labour market frictions caused by Brexit.

Core inflation - which strips out volatile energy and food prices - failed to fall as expected and instead held at 6.2per cent, while services inflation - which the BoE views as a proxy for domestic price pressures - held at 6.6per cent.

"It's now clear the UK has an inflation problem that is worse and more persistent than in Europe and the U.S.," said Ed Monk, associate director of personal investing at asset manager Fidelity International.

"Price rises here are proving more difficult to neutralise and the Bank of England will almost certainly add at least one more quarter-point hike to borrowing costs."

Earlier this month, the BoE's chief economist, Huw Pill, said the central bank still needed to "see the job through" on monetary policy tightening, though he saw some signs of falling inflation pressures.

Investors now fully price in a quarter-point interest rate rise to 4.25per cent on May 11 after the BoE's next meeting - up from an 80per cent chance on Tuesday - and expect rates to peak at 5per cent by September, according to futures markets.