By Andy Bruce and William Schomberg
LONDON (Reuters) - British inflation has hit a 10-year high as household energy bills rocket, bolstering expectations the Bank of England will raise interest rates in December just weeks after it rocked markets by keeping borrowing costs on hold.
Consumer prices rose by 4.2% in annual terms in October, leaping from a 3.1% increase in September, the Office for National Statistics said on Wednesday.
The BoE and a Reuters poll of economists - none of whom predicted such a big jump - had pointed to a reading of 3.9%.
"Today's inflation data will reinforce the Bank of England's resolve to act," Yael Selfin, chief economist at KPMG UK, said.
The pound climbed briefly to a one-week high versus the U.S. dollar and a 21-month high against the euro. [GBP/]
Finance minister Rishi Sunak said rising inflation was not just a British problem and the government was taking action to offset the hit to spending power, even as it scales back most of its coronavirus emergency support.
Britain's inflation rate puts it in the middle of the pack among G7 countries, with annual U.S. consumer price inflation now running north of 6%.
Household energy bills were the biggest driver of inflation following the lifting of a regulatory cap on bills last month, with gas prices paid by consumers up 28.1% in the year to October.
British energy suppliers are grappling with soaring wholesale gas prices that have led to the collapse of a number of energy companies, forcing more than 2 million customers so far to switch providers - often on higher tariffs.
But prices rose across the board with second-hand cars among the biggest drivers of the inflation acceleration.
The BoE - which has a target of 2% inflation - has said higher borrowing costs can do nothing to influence energy prices. But some of its policymakers are concerned that high inflation could harm its credibility in the eyes of the public.
Forecasts by the BoE show it expects inflation to hit around 5% in the coming months before falling back.
The BoE looks poised to become the first of the world's major central banks to raise rates since the coronavirus pandemic swept the global economy. Investors and economists are increasingly predicting that will happen on Dec. 16.
On Monday BoE Governor Andrew Bailey said he was "very uneasy" about the inflation outlook and that his vote to keep rates on hold earlier this month had been a very close call.
Futures markets now fully price in a 15 basis-point rate hike in December, and show a roughly two-thirds chance of another 25 basis-point hike in February, taking Bank Rate to 0.5% from its current all-time low of 0.1%.
On Tuesday, data suggested Britain's labour market was withstanding the end of the government's job-protecting furlough scheme, a key factor for the BoE and its decision on rates.
Robert Alster, chief investment officer at wealth manager Close Brothers Asset Management, cautioned, however, against assuming a BoE rate hike next month was a done deal.
"Ultimately, the impact of rising inflation on consumer spending and confidence will be a critical measure of stability, and determine how hawkish the Bank needs to be," he said. "We may well see the rate rise kicked into 2022."
Ben Lord, a portfolio manager at M&G Investments, said tax rises and less pandemic emergency spending by the government in early 2022, combined with the end of the BoE's bond-buying stimulus programme, posed risks for Britain's economy.
There were signs in Wednesday's data of further inflation pressure in the pipeline. Prices charged by factories rose by more than expected, up 8% compared with October 2020, the sharpest increase since 2011.
Manufacturers' input costs jumped by 13%, the most since 2008, the ONS said.