UK inflation hits highest
since June 2014 as fuel prices surge
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[February 14, 2017]
By Andy Bruce and David Milliken
LONDON
(Reuters) - British consumer prices rose last month at the fastest pace
since June 2014 and are set to rise further, propelled by higher global
oil prices and the Brexit-fueled fall in the pound, official data showed
on Tuesday.
Consumer prices increased by 1.8 percent compared with a year earlier,
picking up from 1.6 percent in December, and prices paid by factories
jumped by more than 20 percent.
The Bank of England expects inflation to approach 2.7 percent by the end
of the year while many economists say it will go above 3 percent,
putting to the test the BoE's decision to keep interest rates at a
fraction above zero.
At the same time, stronger inflation will put a strain on the spending
power of British households who have so far helped the economy withstand
the shock of last June's vote to leave the European Union.
Sterling fell below $1.25 and government bond prices rose after
January's inflation reading came in slightly below expectations for a
1.9 percent annual rise in a Reuters poll of economists, held back by a
fall in clothing prices.
"We're only seeing the thin end of the wedge in terms of inflation,"
said Richard Lim, chief executive of consultancy Retail Economics. He
noted that hedging contracts taken out by retailers to protect against
sterling's fall were unwinding.
"We expect inflation will accelerate sharply in the coming months,
hitting 3 percent by the end of the year," he said.
Factories suffered the sharpest annual rise in prices since September
2008 as raw material costs jumped by more than a fifth in January
compared with the same month last year.
The major factor was the cost of crude oil, which was more than 88
percent higher than a year earlier - the biggest increase since June
2000 - overwhelmingly driven by a global rebound in oil prices.
In dollar terms, the cost of North Sea oil at the end of January was
around 60 percent higher than a year earlier, when it had touched a
12-year low.
INFLATION RISK? SLOWDOWN RISK? THE BOE'S TRADE-OFF
The pound's fall - it is down about 17 percent against the U.S.
dollar and 11 percent against the euro since the Brexit vote - is
starting to hit consumers, whose spending has helped the British
economy to grow since the vote.
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A woman holds a Union Flag shopping bag in London, Britain April 23,
2016. REUTERS/Kevin Coombs/File Photo
Last week BoE rate-setter Kristin Forbes said she was beginning to
become uncomfortable with the central bank's commitment to a neutral
policy stance, arguing instead that interest rates may need to rise
soon if price pressures continue to build.
But most of her colleagues have given no sign they want to raise
rates soon, given the uncertain outlook for Britain's economy as the
country leaves the EU. BoE Governor Mark Carney this month warned of
"twists and turns" ahead as Prime Minister Theresa May starts two
years of formal Brexit talks.
Food prices showed the smallest annual decrease since July 2014 as
the cost of chocolate and sweets rose by almost 5 percent on the
month.
Retail price inflation - tracked by British inflation-linked
government bonds and many commercial contracts - also rose to its
highest since June 2014, at 2.6 percent.
Excluding oil prices and other volatile components such as food,
core consumer price inflation held steady at 1.6 percent,
confounding economists' expectations for a rise to 1.8 percent.
Data on factory gate prices underscored the inflationary pressures
in the pipeline. Output prices rose 3.5 percent on the year, the
biggest increase since January 2012, compared with forecasts of a
3.2 percent increase.
December house prices showed an 7.2 percent annual rise across the
United Kingdom, compared with 6.1 percent in November. Prices in
London alone rose 7.5 percent on the year.
(Editing by William Schomberg and Mark Trevelyan)
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