By Ian McConnell

Business Editor

UK inflation has climbed to a fresh near-30-year high, prompting trade union Unite to reiterate demands for significant pay increases to combat a “brutal cost-of-living crisis” following calls this month for “restraint” from Bank of England Governor Andrew Bailey.

Official figures published yesterday show annual UK consumer prices index inflation rose from 5.4 per cent in December to 5.5% in January, its highest since March 1992 and 2.75 times the 2% target set for the Bank of England by the Treasury. Annual CPI inflation was 0.4% in February last year.

Annual inflation on the old all-items retail prices index measure surged from 7.5% in December to 7.8% last month, the data from the Office for National Statistics reveal.

The Institute for Fiscal Studies think-tank highlighted the impact of the surge in annual RPI inflation in recent months on the cost for the UK Government of servicing index-linked debt. It calculated that central government spending on debt interest this financial year would be £27 billion higher than the £42bn figure forecast in the March 2021 Budget.

READ MORE: More front than Blackpool as Tories talk up economy: Ian McConnell

Mr Bailey sparked controversy earlier this month when he called for “restraint” on pay rises. Unite general secretary Sharon Graham declared at the time that this was tantamount to a call for a “national pay cut”.

Ms Graham said yesterday: “Soaring inflation is not the fault of workers. This is yet another crisis not of their making so why should workers be made to pay for it?

“It’s a national disgrace that some workers in this country have to choose between heating and eating while profits rain down in boardrooms.”

She added: “Unite will continue to demand significant pay increases to combat this brutal cost-of-living crisis because we must restore some fairness to working life in the UK...Where employers can pay, they should pay. We are fed up of rich men telling workers they have to pay for boardroom greed and colossal market failure.”

Suren Thiru, head of economics at British Chambers of Commerce, said: “Rising inflation highlights both the cost-of-living crisis facing households and the uphill struggle for businesses to keep a lid on price rises amid surging cost pressures.”

The rapidly worsening inflation crisis has heightened expectations of further swift rises in UK interest rates from the Bank of England.

The Bank has predicted annual UK CPI inflation will peak at 7.25% in April.

A poll published this week revealed a further quarter-point rise in UK base rates next month, to 0.75%, is now forecast by nearly two-thirds of economists.

Twenty-five out of 40 economists polled by Reuters between February 7 and 11 predict the Bank of England’s Monetary Policy Committee will vote for such a rise next month. The next rates decision is due to be announced on March 17.

Meanwhile, 21 out of 41 economists predict a further rise in benchmark UK interest rates to 1% in the second quarter.

Colin Dyer, client director at abrdn Financial Planning, said: “The Bank of England could…be justified in raising interest rates more than once over the next few months to defend these soaring prices – meaning even more challenges may lie ahead for households.”

READ MORE: UK interest rates: Push for sharper rise flags scale of troubles: Ian McConnell

Mr Thiru said: “Inflation should peak at over 7% in April as reversal of the hospitality VAT (value-added tax) cut and the energy price cap rise [enter] the calculation. However, the current Russia-Ukraine tension could keep inflation higher for longer by triggering a further surge in wholesale energy costs.”

He added:“Rising inflation could well be a significant drag anchor on UK economic output this year by weakening consumer spending power and damaging firms’ finances and ability to invest.”

Highlighting the impact of the surge in annual RPI inflation on the cost for the UK Government of servicing debt, Institute for Fiscal Studies research economist Isabel Stockton said yesterday: “The last decade has seen debt interest spending consistently come in below forecast, and often by a significant margin. That pattern is set to reverse. Today’s figures show that annual RPI inflation now stands at 7.8%, well above what was forecast in the October Budget, and this will push up the cost of servicing index-linked debt.”

She added: “As a result we now project that central government spending on debt interest this financial year will come in at around £69bn, some £11bn higher than the £58bn forecast in the October 2021 Budget and £27bn above the £42bn forecast in the March 2021 Budget.

“Looking ahead into 2022/23, the October Budget forecast that debt interest spending would be £53bn. The increase in the outlook for the RPI since then could easily add another £12bn to this figure.”

Average petrol prices stood at 145.1 pence per litre in January, compared with 116.6p a year earlier, the ONS figures show. The January figure is slightly below the record high of 145.8p a litre recorded in both November and December.

Electricity prices in January were up 19.2% on the same month of last year. Gas prices last month were up 28.3% year-on-year. These sharp year-on-year increases precede the 54% hike in the energy price cap announced earlier this month by regulator Ofgem, which takes effect on April 1.

Clothing and footwear prices played a key part in pushing up annual CPI inflation between December and January. The 2.9% month-on-month fall in prices in this category in January was much smaller than a 4.8% drop a year earlier.