Inflation rise piles pressure on Bank of England
INFLATION CAME in higher than expected at the start of the year as the Bank of England faces increasing pressure to hike interest rates as soon as the spring.
Figures from the Office for National Statistics (ONS) published yesterday revealed that the Consumer Prices Index (CPI) rate of inflation came in at three per cent in January, unchanged from December, but lower than the most recent peak of 3.1 per cent in November.
Economists were pencilling in a drop to 2.9 per cent, and Ben Brettell, a senior economist at Hargreaves Lansdown, said it would have marked the first step towards bringing inflation back to the Bank’s two per cent target.
“Inflation’s now been above target for 12 straight months. This adds further weight to the case for higher interest rates sooner rather than later,” he said.
Mr Brettell said it now looks like the next rise “may well happen in May”.
He added: “Indeed Bank of England policymakers said last week they’ll try and bring inflation back to target more quickly than previously expected, which means rates could rise faster and further than anticipated.”
Chris Williamson, chief business economist at IHS Markit, said inflation is likely to remain “stubbornly high for some time to come”, but warned that an interest-rate hike should not be taken for granted.
He added: “While the door remains open for a May interestrate hike, the Bank of England will likely need to see indicators of the economy’s health improve to be sufficiently reassured that the economy is ready for another rise in borrowing costs.”
Higher inflation has been fuelled in part by the Brexit-induced collapse of the pound, which has made imports more expensive and driven up the cost of living, adding pressure on households squeezed by paltry wage growth.
While ONS reported signs of weaker price rises for fuel and food in January, those were offset by a shallower fall in leisure costs.
Petrol prices rose by 1.1p per litre on the month to 121p per litre, while diesel rose 1p to 124.5p per litre.
Food price inflation also appeared to be slowing, having risen strongly since mid-2016, edging down 0.1 per cent on the month amid larger falls in the cost of meat, oils, milk, cheese and eggs.
Sterling rose 0.5 per cent against the dollar to $1.39 following the news. Against the euro, the pound was trading flat at 1.12 euros.
Clothing prices helped to prop up the inflation figure despite having fallen 3.7 per cent month on month, which marked a weaker drop compared to the 4.3 per cent fall during the same period a year earlier.
Airfares, which usually fall after the holidays, also dropped at a slower rate, down just 33.2 per cent month on month, compared to a 36 per cent drop a year earlier.
The Retail Prices Index (RPI), a separate measure of inflation, edged lower to four per cent last month from 4.1 per cent in December.