Higher-than-expected inflation has helped the pound rise against the US dollar, as markets expect the Bank of England to proceed with further interest rate hikes.

According to the Office for National Statistics, UK CPI inflation rose 6.2% year-on-year in February, more than the 5.9% increase markets were expecting and higher than the 5.5% reported in January. Core inflation rose 5.2% in February, more than January's 4.4% figure. As a result, prices for goods rose, including those for food and games.

UK inflation

UK inflation has surged to a new 30-year high as higher energy, fuel bills and food prices drove the worst cost of living squeeze in decades. That’s the highest inflation reading since March 1992, at a time when household budgets are coming under extreme pressure. Last week, the Bank of England predicted inflation could reach 8% in April and could even go as high as 10% in the autumn when the energy price cap rises again.

The news comes hours before Rishi Sunak presents his mini-budget, as he prepares a fresh package of measures to alleviate inflationary pressures on consumers. He is expected to promise “a faster-growing economy, the security of more resilient public finances, and security for working families as we help with the cost of living.”

Sunak has a difficult task, as with inflation so high, taxes rising next month, and benefits such as pensions rising by 3.1 per cent, household incomes will experience a sharp fall.

Jack Leslie, senior economist at the Resolution Foundation has said that the Chancellor will need to set out a bold response to the situation as “Another sharp rise in inflation last month offers a foretaste of the huge income squeeze coming this year, with inflation likely to hit at least 8 per cent this spring – which could be the highest it’s been in 40 years – along with a second spike this autumn.” Leslie noted that prolonged high inflation “is a complete disaster for living standards. It will mean pay packets continuing to shrink, along with vital income support such as Universal Credit and the State Pension. The Chancellor will need to set out a bold response to this cost of living crisis in his Spring Statement today, starting with ensuring that benefits keep pace with inflation over the coming 12 months, rather than shrink by £10 billion as they are currently on course to do.”

Bank of England rate hikes

Markets have raised their expectations this week for the number of Bank of England rate hikes that are likely to be delivered in 2022, pushing the value of the pound higher. If this continues, then the pound will go higher.

Economists are concerned that inflationary pressures will continue to persist and increase, adding more pressure to the Bank to act.

Pantheon Macroeconomics has reported that higher inflation will stall UK economic recovery as households’ spending power shrinks. Chief U.K. Economist at Pantheon Macroeconomics Samuel Tombs expects the BoE to stop raising interest rates once the Bank Rate is 1.00% in May as further rate hikes will increase the risk of economic recession. The market has priced in up to 138 points of rate hikes for 2022 which means there is room for disappointment if the Bank pauses hiking rates which could also push the pound lower.