UK inflation has hit its highest rate for two-and-a-half years, taking a step nearer the Bank of England’s (BoE) 2% target, according to Office for National Statistics (ONS) figures.
The headline consumer prices index (CPI) figure jumped to 1.8% at the end of January, up from 1.6% at the end of December.
CPI is now at its highest level since June 2014, despite falling short of the 1.9% consensus forecast for January.
The Office for National Statistics (ONS) said the increase was mainly driven by rising fuel prices and, to a lesser extent, food prices which were unchanged between December 2016 and January 2017, having fallen a year ago.
It added these upward pressures were partially offset by prices for clothing and footwear, which fell by more than they did a year ago.
Investec Wealth & Investment bond strategist Shilen Shah said despite the headline figure coming in slightly below consensus, there are clear signs that inflationary pressures are building in the UK economy with import prices increasing by 20% year-on-year, led by crude oil.
“The Bank of England’s currently neutral stance is significantly supported by its latest estimate about the amount of spare capacity in the economy,” he added. “However if the path of CPI is stronger than it currently estimates, we may eventually see a stronger reaction from the central bank.”
Faraday Research senior market analyst Jamie Dutta said inflation was forecast to rise above the BoE’s target in the near future, but a rate hike could be on ice given the uncertainty around Brexit.
He said: “What seems fairly obvious from here is that Governor Carney’s recent comments about Britain facing ‘twists and turns’ as it departs the EU are highly pertinent.
“The triggering of Article 50 in March and the two years after this will be highly uncertain and it seems likely to us that Governor Carney will want to sit on his hands for some time regarding interest rate hikes.”
Similarly, Royal London Asset Management economist Ian Kernohan said he expects CPI to rise further and move above target later in the year as the impact of sterling weakness feeds through.
However, he added: “We see no interest rate increase from the Bank of England this year or next.”
From 21 March, the ONS is changing its headline measure of inflation from CPI to CPIH which is the consumer prices index including owner occupiers’ housing costs and council tax, both of which the ONS said are important components of household expenditure.
