Higher energy costs, rising demand, and supply chain concerns drove up consumer prices in December, pushing the UK inflation rate to a 30-year high.

Inflation rose to 5.4 per cent on an annual basis, the highest level since March 1992, and up from 5.1 per cent in November, which was also a decade high. Reuters polled economists, who predicted a 5.2 per cent increase.

Consumer prices increased 0.5 per cent on a monthly basis, exceeding economist expectations of a 0.3 per cent increase.

The rising cost of living has fuelled speculation that the Bank of England would raise interest rates once more. The Bank of England became the first major central bank to begin raising borrowing costs from pandemic-era lows in December.

Following the 15-basis-point raise to 0.25 per cent in December, markets will be watching the Monetary Policy Committee’s next meeting on Feb. 3. Policymakers are expected to contemplate another rate hike.

The Bank is also working in a labour market that is unusually tight, with vacancies at an all-time high and employment still below pre-pandemic levels.

The Bank of England’s decision to raise rates was validated by December’s data, according to Paul Craig, portfolio manager at Quilter Investors, but February’s meeting may still go any way.

“The MPC will be faced with a difficult trade-off between ensuring financial stability or helping households cope with a cost of living crisis that is set to squeeze household finances over a difficult winter period,” he said.

“It’s not just the cost of living that is increasing, so is the cost of going to work, and wage increases may not be enough to cover the cost of returning to normality.”

On Tuesday, the Office for National Statistics released numbers showing annual wage growth of 3.8 percent in December, meaning that workers are seeing a real-terms pay fall, and Craig stated that there is now a “very serious fear” that in-work poverty is increasing.

According to the ONS, the Consumer Prices Index, which includes owner occupier housing expenses (CPIH), increased by 4.8 per cent in the year to December, up from 4.6 percent in November and the highest level since September 2008. Housing and domestic services, as well as transportation, contributed the most.

The Bank of England’s dissatisfaction with its present policy position will be exacerbated by upside surprises in both headline and core inflation readings, according to Ambrose Crofton, global market strategist at JPMorgan Asset Management.

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

“But in the near term, consumers are still 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 per cent in April.”

Wage increases, he said, will “ease the pressure” of rising prices, but they could also fuel a period of above-target inflation.

(Adapted from CNBC.com)