"If inflation readings continue to overshoot expectations, the pressure will only grow on the Bank of England to give more consideration to the medium-term path of inflation"
This was higher than a consensus expectation among City economists of 6.7% and is the highest annual inflation rate since March 1992.
Meanwhile, the CPI monthly rate for March 2022 was 1.1%, compared with 0.3% in March 2021. The ONS said the biggest contributor to rising inflation was transport, with average petrol prices rising by 12.6p per litre between February and March, the largest monthly rise since records began in 1990.
Adrian Lowery, personal finance expert at investing platform Bestinvest, commented: "It’s yet another overshoot compared to expectations, although small in percentage terms as the headline rate of inflation gets higher. (Consumer prices across the economy are moving so quickly that analysts can be forgiven a few percentage points.)
"Nevertheless, if inflation readings continue to overshoot expectations, the pressure will only grow on the Bank of England to give more consideration to the medium-term path of inflation, over the possible drags on the real economy caused by higher rates.
"The danger is that as inflation expectations rise, so do wage demands and bargaining power, and that could entrench what is hoped to be a short-to-medium term spike in inflation into a medium-to-long term problem. While the monetary policy committee has the flexibility to bring inflation gradually back down to target in a year or two’s time – the central projection for 2% was forecast to be met the end of 2023 in the MPC’s February report - it’s questionable how such projections can be viewed with any confidence given the febrile economic conditions.
"The MPC was pretty doveish at the last meeting, reasoning that domestic rate hikes will do little to calm inflation that is largely being imported via input prices, and warning of the headwinds facing the UK economy. It almost unanimously favoured the smallest increase of 0.25% with one member voting for a hold. With this in mind, the same outcome can be expected at the meeting that concludes on Thursday 5 May, at which point they will also issue what will be a keenly awaited economic report and new forecasts.
"Many analysts were best-guessing that after May, with the bank rate bumped up from 0.75% to 1.0%, we could see a summer pause in the rate hike cycle. Another CPI overshoot in next month’s data could change that best guess."
Paul Craig, portfolio manager at Quilter Investors, said: “UK inflation continues its march upwards and is has now topped 7% in March, continuing to remain at levels not seen for 30 years. Unsurprisingly, the biggest contributions continue to come from soaring energy, fuel and food prices, among others, and worryingly for consumers and policy makers, nothing is offsetting it.
“Last month’s Spring Statement did little to quell the fears of those already feeling the squeeze financially, and the introduction of the new energy price cap and the national insurance increase has further increased the pressure. With wages failing to keep up and pensions not rising by a similar amount, things are going to get tough for a lot of consumers.
“Alongside the Bank of England’s most recent interest rate hike came the prediction that inflation would hit 8% later this spring. The Bank has underestimated the extent of inflation in previous forecasts and given this month’s increase, there could be even worse to come than previously feared.
“The Bank of England is looking more and more as if it is on the back foot in this fight against inflation. While trying to remain coordinated with other central banks, it appears they may have been too late in tightening monetary policy conditions and subsequently inflation has spiralled out of control. With the delicate market environment owed to both rising inflation, the uncertainty surrounding Russia’s war on Ukraine and now severe lockdowns in China, we could easily see inflation rise above the BoE’s forecasts. Investors will need to continue to watch the data and markets closely and allocate accordingly. Diversification, active management and prudency remain key.”
Sarah Giarrusso, investment strategist at Tilney Smith & Williamson, added: "The increased cost of living is a key concern as real wages continue to be squeezed. Given this headwind growth is likely to decelerate from here and forecasts for the UK economy have been revised down. However, there are still some positive signs for the economy. The labour market has recovered strongly since the height of the pandemic. More jobs have now been added than were lost in that period and the unemployment rate fell further in this month’s data release to 3.8%, back to the pre-pandemic level.
"This tightness in the labour market coupled with high inflation has underpinned the Bank of England’s decision to tighten monetary policy. The Bank has made three consecutive interest rate hikes and continues to emphasise its commitment to price stability. This has brought the base rate up to 0.75% and market expectations are for the rate to reach 2% by the end of this year. However, the effect the elevated cost of living on the real economy represents a risk to this trajectory."
