UK and Canada Inflation Rates Hit 30-Year High... Major Advanced Economies Accelerate Tightening Measures

Canada Expected to Raise Key Interest Rate for First Time Since COVID-19 on 26th... UK Also Anticipated to Implement Additional Increase Next Month

[Asia Economy Reporter Park Byung-hee] As consumer price inflation rates in the UK and Canada soar to their highest levels in 30 years, the tightening measures of major advanced economies worldwide are expected to accelerate further.

According to major foreign media on the 19th (local time), the UK Office for National Statistics announced that the consumer price index (CPI) inflation rate for December last year was recorded at 5.4%, marking the highest level since the current CPI calculation method was introduced in 1997.

The statistics office added that even when applying the previous calculation method, the December CPI inflation rate was the highest since March 1992. The UK CPI inflation rate continued its upward trend from 5.1% in November, exceeding market expectations of 5.2%.

On the same day, Statistics Canada also announced that the December CPI inflation rate last year was 4.8%, the highest since September 1991. The core CPI inflation rate, which excludes food, beverages, and energy items, also recorded 2.93%, marking the highest level in 30 years. Canada's CPI inflation rate in November last year was 4.7%, and the core CPI inflation rate was 2.73%.

As inflation continues to rise, the tightening measures in the UK and Canada are expected to gain momentum.

Andrew Kelvin, Chief Investment Strategist at TD Securities, said, "The Bank of Canada (BOC) is expected to raise the benchmark interest rate from 0.25% to 0.50% at its first monetary policy meeting of the year on the 26th." Raising the benchmark rate would mark the first increase since the COVID-19 pandemic.

Scotiabank also stated in a report released on the same day that the BOC's monetary tightening pace will accelerate, significantly raising its year-end forecast for the Canadian benchmark interest rate from 1.25% to 2%. Scotiabank expects that after the first rate hike on the 26th, there will be additional increases of 0.25 percentage points in March, 0.50 percentage points in April, and three more hikes of 0.25% each by the end of the year.

The Bank of England (BOE), the UK's central bank, already raised its benchmark interest rate from 0.1% to 0.25% at its last monetary policy meeting last year. Following the release of the CPI data, there are expectations of an additional 0.25 percentage point increase at the first monetary policy meeting scheduled for the 3rd of next month.

BOE Governor Andrew Bailey appeared before Parliament on the same day, expressing concerns about inflation and signaling an interest rate hike. Governor Bailey specifically mentioned rising wages and natural gas prices, suggesting that the BOE will revise upward its inflation forecasts in the future.

Governor Bailey said, "Due to the conflict between the West and Russia over Ukraine, natural gas prices continue to remain at high levels, which is very concerning." He also warned of the risk of a wage-price spiral, where wages and prices influence each other and rise together. Governor Bailey explained that companies need to pay higher wages to hire new employees, which in turn raises wages for other workers doing similar jobs, increasing inflation risks.

Coincidentally, the BOC also released a quarterly business outlook report on the 17th, in which companies analyzed that wage increases are burdensome.

In the BOC survey, companies responded that the pace of wage increases is steep due to labor shortages, raising the possibility of secondary inflation. Companies also stated that they plan to increase investments this year to meet rising demand amid ongoing supply chain disruptions, and that the increased cost burden will have to be passed on to consumers.