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Inflation: Why the Bank of England doesn't want shops raising prices even higher

Yahoo News UK explains why shops rising prices spells long-term trouble, and what the recent rate hikes mean for you

What's happening? The Bank of England governor Andrew Bailey has urged businesses not to hike their prices following a surprise increase in inflation amid huge rises in food prices.

On Wednesday, it emerged inflation had surprisingly increased to 10.4% in February, leading the Bank to hike interest rates the following day for the 11th time in a row to 4.25%.

The bank's governor has since urged businesses not to rise their prices in response to inflation.

"When companies set prices I understand they have to reflect the costs that they face," he told BBC Radio 4's Today programme on Friday. "But when they are setting prices in the economy we do expect inflation to come down this year and I would say please bear that in mind.

"I would say to people who are setting prices - please understand if we get inflation embedded, interest rates will have to go up further and higher inflation really benefits nobody," he added. "It hurts people, and it particularly hurts the least well-off in society."

Yahoo explains why inflation is up...

Food and drink prices spike

While inflation is not yet back to the 40-year high seen in October (when it hit 11.1%), February marks the first time inflation has risen in four months after successive drops down to 10.1% in January.

The main reason behind the rise is increasing costs of food and drink - which rose to their highest rate in 45 years. The Office for National Statistics put inflation of food and non-alcoholic beverages at 18%, caused in part by the salad crisis, which saw empty shelves and consumers struggling to find produce like tomatoes.

As well as food and beverage price hikes, there were also increases in hospitality and clothing, which pushed inflation back up, surprising economists who had predicted a further drop in February to 9.9%.

“Food and non-alcoholic drink prices rose to their highest rate in over 45 years with particular increases for some salad and vegetable items as high energy costs and bad weather across parts of Europe led to shortages and rationing," according to ONS chief economist Grant Fitzner.

“These were partially offset by falls in the cost of motor fuel, where the annual inflation rate has eased for some seven months.”

Among the spikes in food prices, bread rose 20.8%, vegetables rose 18% and meat was up 16.3%

Vegetables on sale at a stall in London, Tuesday, Feb. 28, 2023. Grocery price inflation has reached a record 17.1% to add a potential £811 to annual household shopping bills. This month marks a full year since monthly grocery inflation rose beyond 4% as consumers named it their second most important issue behind energy costs. (AP Photo/Alastair Grant)
Grocery price inflation rocketed in February. (AP Photo)

How do interest rate hikes affect you?

Explaining its interest rate hike on Thursday, the Bank of England said the raise "means many people will face higher borrowing costs", adding: "And some businesses will face higher loan rates".

"We know that will make things harder for many people, coming on top of higher energy and food bills.

"But we need to act to lower inflation. Low and stable inflation is vital so that money keeps its value and people can plan for the future with confidence. It’s fundamental for a healthy economy."

The rate hike will see loans or mortgages that are connected to the base rate go up, while rates for new mortgages will also be higher - however, those on fixed-term mortgages won't see an increase in prices until their fixed term comes to an end.

However, while some people will face greater borrowing costs, the Bank also said it did not expect the UK to go into a recession this year.

Andrew Bailey, Governor of the Bank of England, attends the Bank of England Monetary Policy Report Press Conference, at the Bank of England, London, Britain, February 2, 2023. Yui Mok/Pool via REUTERS
Andrew Bailey said he expected inflation to fall over the year despite it going up in February. (Reuters)

Inflation: What happens next?

The Bank of England's governor has urged companies not to push their prices up following the surprise rise in inflation - urging caution that such moves could see inflation "embedded".

Despite the unexpected rise in inflation for February, the bank said it continued to expect inflation to fall fast throughout 2023.

Among the reasons behind an expected drop in inflation in future are a drop in wholesale energy prices, as well as a drop in the cost of imported goods thanks to the easing of production and supply chain issues.

"There are signs that inflation might now have turned a corner," the bank said. "It stopped rising around the middle of last year and has been roughly stable since then. We expect inflation to begin to fall quite sharply from the middle of this year. But we need to make sure that it falls and then stays low."

Rishi Sunak has made halving inflation a key pledge for 2023 - while Chancellor Jeremy Hunt has said he expects it to fall to 2.9% by the end of the year.