Talking Point 

Inflation hits 30-month high to move closer to target

Inflation hits 30-month high to move closer to target

UK inflation is creeping ever closer to the Bank of England's (BoE) 2 per cent target reaching a 30-month high of 1.8 per cent in January.

The Office for National Statistics (ONS) figure - which is a rise from the 1.6 per cent in December and the highest since June 2014's 1.9 per cent - was largely down to transport and fuel costs. Such costs rose close to 0.9 per cent last month compared to a fall in January 2016. Food and alcoholic beverages costs also had an impact falling significantly less than 12 months earlier.

The 1.8 per cent CPI figure came in below expectations of a 1.9 per cent rise - largely due to a fall in clothing inflation and an impact of retailers' sales techniques. However, the below-expectation figure has not deterred economists continuing to forecast a 3 to 3.5 per cent figure by the end of 2017.

In its own predictions, the BoE said earlier this month that it expected inflation to average at 2 per cent for this year and 2.7 per cent for 2018 - but admitted the effects of a sterling depreciation were entering the economy faster than it previously anticipated.

The BoE's estimates were slightly predicated on domestic inflation from the services sector weakening this year - yet January's data showed a rise from 2.5 per cent to 2.6 per cent, casting some doubt on the bank's more timid outlook.

Its own preferred measure of 'core CPI' remained unchanged in January at 1.6 per cent, however.

Food inflation is also likely to cause more of an upset in the short term, as retailers continue passing on the higher cost of imported products, according to Pantheon chief UK economist Samuel Tombs.

He added: "Sterling’s depreciation [will boost] food and core goods prices and as energy firms hike prices. With wage growth looking anchored at about 2.5 per cent, a sharp slowdown in consumer spending continues to beckon."

However, WisdomTree director of research Viktor Nossek disagreed with the higher forecasts, and suggested the weaker UK economy would keep a lid on price rises.

"The [BoE] 2 per cent target represents something of a ceiling for CPI unless we see dynamics change.

"Oil prices have so far lacked momentum, despite significant cuts to crude oil output. Indeed, the signs are that economic activity could weaken in the near term as the UK’s dominant services sector is slowing down, keeping a lid on demands for higher wages."

The wage inflation figure will be released tomorrow (Wednesday) - with the last figure coming in at 2.8 per cent in the three months to November 2016.

Yet further analysis of the January figures showed cost pressures were building in the production pipeline. Input prices rose 20.5 per cent last month, the highest since September 2008. Production firms are still absorbing some costs, but it will ultimately feed through to consumer prices, according to Capital Economics.

True Potential deputy chief investment officer Chris Leyland warned the rising figure - not matched by rising interest rates from the BoE - would continue to hit savers hardest.

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