(Bloomberg) -- Britain’s inflation rate remained stubbornly high in double digits in March, another surprisingly strong reading that will strengthen the case for more interest rate rises at the Bank of England.

The Consumer Prices Index rose 10.1% from a year ago, driven by the strongest increase in food prices in more than four decades, the Office for National Statistics said Wednesday. Economists had expected a slowdown to 9.8%. 

Investors quickly moved to price in further rate hikes from the Bank of England, continuing the quickest tightening cycle in four decades. Policy makers led by Governor Andrew Bailey had signaled a pause was possible if inflationary pressures subsided, but today’s reading suggests that prices in the UK have more momentum than in the US or eurozone.

Money-market traders priced a peak BOE interest-rate of more than 5% this cycle, the highest this year. They also expect two consecutive 25-basis-point increases in May and June, according to swaps tied to the meeting dates.

The pound edged higher against the dollar and gilts fell as the market adjusted to the prospect of steeper rate increases. Sterling jumped as much as 0.4% to $1.2469 while the yield on two-year notes rose 13 basis points to 3.82%.

“The Bank of England’s job is not yet done,” said Kitty Ussher, chief economist at the Institute of Directors. “To address the underlying issues the MPC still needs to raise rates again when it meets in a few weeks’ time.”

Britain’s inflation problem combines the worst features of the US and Europe — soaring energy prices that hit across Europe and a level of workforce dropouts similar to the US. The combination has led British workers to demand sharply higher wages, setting off fears at the BOE about an inflationary spiral.

The UK also is more vulnerable to imported food prices than the rest of Europe and has been hit by shortages of fresh food such as tomatoes and lettuce from places where bad weather reduced crop yields. A shortage of workers interrupted grocery store supply chains and strained food production in certain sectors such as dairy where milk and cheese prices have shot up. 

George Buckley, an economist at Nomura who had expected no more rate hikes, lifted his forecast for the BOE’s peak rate by a half point to 4.75%. Another formerly dovish economist, Bruna Skarica at Morgan Stanley, now has a quarter-point hike next month as her base case and sees risk of another move in June.

Read more: Traders Bet on 5% BOE Peak Rate as Fears Over Inflation Grow

What Bloomberg Economics Says ...

“The stickiness of core and services inflation in the March CPI release leaves the Bank of England on course to lift rates in May. Sharper declines in the headline CPI rate will begin in the April data, as last year’s surge in gas and electricity prices start falling out of the annual comparison, but the March reading serves as a reminder that the path back to 2% will be a slow grind.”

—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.

Britain’s inflation rate retains more momentum than prices in the US and Europe, where CPI has been drifting down for months. In the US, prices rose 5% in March, the slowest in almost two years. In the eurozone, CPI for last month eased to 6.9%, the lowest since February 2022. 

Inflation in the services sector remained 6.6%, while food and non-alcoholic beverages jumped 19.1%, the most since 1977.

Grocery bills continued to spiral higher with food and non-alcoholic drink price inflation hitting a 45-year high of 19.1%. The ONS said it was driven by record increases in costs for bread, hot beverages and chocolate and confectionery.

Both core inflation — which excludes food and energy prices — and services price growth remained stable in March at 6.2% and 6.6% respectively. The two indicators of underlying inflation are being watched closely by BOE policymakers with services seen as a proxy for wage pressures in the economy.

“The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year,” said ONS Chief Economist Grant Fitzner. “However, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high.”

Prime Minister Rishi Sunak made cutting inflation in half by the end of the year one of his five key promises as he battles to restore his Conservative Party’s standing in the polls.

“These figures reaffirm exactly why we must continue with our efforts to drive down inflation so we can ease pressure on families and businesses,” said Chancellor of the Exchequer Jeremy Hunt. “We are on track to do this.”

The BOE is considering whether it can pause its quickest tightening cycle in four decades, anticipating inflation will fall sharply the rest of this year.

However, the rate-setters face a balancing act after resilient wage growth reported Tuesday added to fears that UK inflation will persistent. Earnings excluding bonuses climbed 6.6% in the three months to February even as unemployment edged up and vacancies declined.

It’s now “highly likely” the BOE will push ahead with another quarter point rate rise on May 11, said Hugh Gimber, global market strategist at JP Morgan Asset Management. “The Bank of England is still a long way away from being able to feel comfortable that price pressures are under control.”

However, there were some signs of price pressures easing. Factory gate price inflation cooled significantly in March, suggesting some relief is in the pipeline. Producer input costs rose 7.6%, down sharply from 12.8%, while output prices also moderated substantially.

The cooling suggests that the easing in global supply chain pressures in recent months are now feeding through to factories.

“Prices continue to rise at an alarming rate,” said David Bharier, head of research at the British Chamber of Commerce. “More positively, today’s figures show that the Producer Price Index has eased to 7.6% from 12.8%, indicating the peak may have passed for input price growth”

--With assistance from Elina Ganatra and David Goodman.

(Updates with data on food and forecast changes from seventh paragraph.)

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