Climbing food and fuel prices push inflation closer to bank’s 2% target

INFLATION reached a two-anda-half-year high in January as food and fuel prices pushed up the cost of living.

The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measure of inflation hit 1.8% last month, up from 1.6% in December, marking its highest level since June 2014.

However, the move came in shy of the Bank of England’s 2% target and economists’ expectations of 1.9%.

Danske Bank economist Conor Lambe said the inflation rate was moving closer to the Bank of England’s 2% target.

“Inflation increased from 1.6% in December to 1.8% in January,” he added. “This was partly due to rising fuel prices and less downward pressure coming from food prices.

“With input prices paid by UK manufacturers and output prices received by manufacturing businesses on the up, consumer price inflation is likely to rise further over the months ahead.”

The Producer Price Index showed that input prices — the amount paid for materials and fuel by UK manufacturers — saw its highest rate of growth since4 September 2008, rising 20.5% in January.

Sterling’s slump against the US dollar and the euro since the EU referendum result, coupled with rising oil prices, also caused import prices to leap 20.2% over the period, the ONS said.

Ballooning import prices triggered by the Brexit-hit pound are expected to push up everyday prices as companies pass their soaring costs to consumers.

The pound was down 0.5% against the US dollar at 1.246 and 0.6% lower against the euro at 1.17 after inflation came in lower than forecast.

The Bank of England expects inflation to lift to its 2% target this month, peaking at 2.8% in the first half of next year, before falling back to 2.4% in three years’ time.

Kristin Forbes, one of the nine rate-setters on the Bank’s Monetary Policy Committee, signalled last week that she was inching closer to voting for a rate rise after becoming increasingly “uncomfortable” with surging inflation given the economy’s resilience to the Brexit vote.

The main driver behind the jump in CPI came from transport prices, which dropped by less than the amount a year ago, falling by 0.6% between December and January, compared with a 2.5% drop the year before.

Fuel prices climbed 3.4% over the period as the resurgent cost of Brent crude fed its way through to prices at the pumps.

The price of petrol rose to 118.6p per litre in January, up from 114.6p per litre the month before, while diesel reached 121.9p per litre last month, up from 118p per litre in December.

Overall food prices were flat between December and January after falling 0.6% a year ago, as the sharp drop in costs, triggered in part by the supermarket price war, ground to a halt.

The ONS said a rise in the cost of imported foods caused by the Brexit-hit pound may have been a factor that caused the fall in food prices to slow.

Downward pressure on CPI came from a drop in the price of clothing and footwear, which edged down by 4.2% between December and January in contrast to a fall of 3.1% the year before.

Andrew Sentance, senior economic adviser at PwC, expects UK economic growth to hit around 1.5% for both this year and next, despite rising inflation.