In an unexpected turn, UK inflation rose in February as food and energy bills continued to burden households. The consumer price index (CPI) climbed to an annual rate of 10.4%, surpassing the anticipated 9.9% and up from 10.1% in January. Monthly CPI inflation reached 1.1%, beating a 0.6% prediction.

According to the UK Office for National Statistics, the most significant upward contributions to the monthly CPI came from restaurants, cafes, food, and clothing, partially offset by downward contributions from recreational and cultural goods and services, as well as motor fuels. The Consumer Prices Index, including owner occupiers' housing costs (CPIH), rose by 9.2% in the year to February 2023, an increase from 8.8% in January.

This surprising jump breaks the three-month downward trend since the 41-year high of 11.1% in October. British households are grappling with soaring food and energy expenses, while workers across various sectors have engaged in strike action over pay and conditions.

UK Finance Minister Jeremy Hunt emphasized the government's priority to lower inflation from its current "dangerously high" levels during a House of Lords Economic Affairs Committee session.

He stated, "It's the prime minister's first priority to halve inflation." Hunt acknowledged that the rapid pace of central banks' interest rate hikes in efforts to combat inflation has contributed to recent turbulence in multiple financial market sectors.

The Bank of England's Monetary Policy Committee will meet on Thursday to decide on interest rates. Last week, the European Central Bank raised its rates by 50 basis points, despite turmoil in the banking sector.

The rise in inflation creates further challenges for the Bank of England, which has been aggressively increasing interest rates to control inflation. Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, warned that the path to lower inflation will not be smooth and that the Bank of England might need to continue raising the bank rate beyond its current 4%.

Carter also noted that the Office for Budget Responsibility's projection of UK inflation dropping to 2.9% by the end of 2023 seems increasingly ambitious, given the latest data. The ongoing banking crisis and its impact on this prediction remain uncertain.

Jake Finney, Economist at PwC, stated that the recent inflation data was the first setback in the Bank of England's mission since inflation started declining in November. He highlighted the divergence of inflationary pressures, with food price inflation continuing to soar and transport price inflation decreasing as petrol and diesel prices fell.

While PwC still expects inflation to fall for most of 2023, Finney cautioned that "the living standards squeeze is not over yet." The Office for Budget Responsibility anticipates real household disposable income per person, a measure of living standards, to decline by a cumulative 5.7% in 2022/23 and 2023/24.

Regarding the Bank of England's decision on Thursday, Finney said, "the latest inflation data provides a setback, but the Bank of England has made clear they will not be swayed by month-to-month changes in data points." He anticipates one final 25 basis point hike from the Bank of England. However, further volatility in financial markets could alter the sentiment towards a "no change" decision.

This unexpected inflation rise underscores the challenges faced by the Bank of England and the UK government in navigating the delicate balance between controlling inflation and maintaining financial market stability. Households will continue to feel the pinch as they contend with increasing food and energy bills, and the road to economic recovery remains uncertain. The upcoming decisions by the Bank of England will be closely watched, as they will likely have a significant impact on the UK's economic outlook and living standards in the coming months.