20.01.202215:06 Forex Analysis & Reviews: UK sees highest inflation since 1992, Boris Johnson lifts COVID restrictions

The annual rate of consumer price inflation increased to 5.4% from November's 5.1%, the highest since March 1992, the Office for National Statistics said. Economists polled by Reuters had expected a rise to 5.2%.

Following the release of high UK inflation data on Wednesday afternoon, the Pound Sterling rose against the US Dollar. The rally continued on Thursday, with GBP/USD climbing to 1.3610.

Prices for food, hospitality and household goods were the main factors pushing up inflation in December, while fuel prices, the main driver in previous months, remained at recent highs. This provide additional evidence that inflation is becoming endemic rather than transitory. It also bodes ill for households facing multiple rises in the cost of living this spring.

Wednesday's figures showed that core CPI, which excludes more volatile food, energy, alcohol and tobacco prices, rose to a record 4.2% from November's 3.9%.

Retail price inflation rose to a 30-year high of 7.5% in December from 7.1% in November. Admittedly, this figure does not show accurate data and has long been recognized in economic circles as outdated. But, as can be seen, it is still being referred to by both government and business.

Factory price inflation showed tentative signs that cost pressures may have peaked, cooling to 9.3% from 9.4% in November. Inflation for costs paid by producers for material and energy also decreased, to 13.5% from 15.2%.

With such a sharp rise, it is clear that the Bank of England is forced to raise interest rates again. Financial markets now price in a more than 90% chance that the BoE will raise its main interest rate to 0.5% on February 3. Last month it became the world's first major central bank to tighten policy since the start of the COVID-19 pandemic.

Two-year British government bond yields, which are sensitive to financial markets' interest rate expectations, came within a whisker of their highest level since 2011.

Experts believe that British inflation will peak in April, when regulated household energy bills look set to increase by around 50%. Last month the BoE forecast a peak of around 6%, but now some economists see 7% as more likely.

Rising inflation is also turning into a political problem for Prime Minister Boris Johnson's government, which faces calls from the opposition and charities to offset the rise in energy bills.

Boris Johnson has announced the end of all Covid measures from January 26, including compulsory mask-wearing on public transport and in shops and vaccine certificates. Organisations will be allowed to decide whether to use a Covid pass or not. Also, the government will no longer require them to work from home. In addition, Johnson signaled his intention to start treating Covid-19 more like flu and remove the legal requirement to self-isolate.

The British government has reported that the number of infections with the new strain of the Omicron coronavirus has dropped. The record number of Omicron infections has not boosted the number of hospital admissions or deaths in the country. At the same time, Lawrence Young, a virologist at the University of Warwick, said there was no guarantee that infection levels would continue to fall.

The British government's decision stands in contrast to the zero-tolerance approach to COVID-19 in China and Hong Kong and the much stricter restrictions in many other European countries such as Germany, Italy etc.

Notably, Scotland, Wales and Northern Ireland have taken their own measures to control the coronavirus. In most cases, the restrictions were stricter than in the UK. However, following the example of the UK government, these countries have also begun to lift the restrictions.

Boris Johnson faced new calls for his resignation over a party he attended with Downing Street staff, when the country was under lockdown. Given this, the Prime Minister hopes to win approval and support among the opponents of quarantine restrictions.