Inflation points to 'disaster' for UK households

Inflation points to 'disaster' for UK households

Inflation remained unchanged at 3 per cent in January, according to data published by the Office for National Statistics (ONS).

Fuel and food prices both fell but the cost of recreational and cultural services helped keep inflation up.

The cost of admissions to attractions such as zoos and gardens had a particularly big impact on the overall level of price growth during January.

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James Tucker, a senior statistician at the ONS, said: "The largest downward contribution came from transport, in particular, prices for motor fuels, which rose by less than they did a year ago.

"A smaller downward effect came from food and non-alcoholic drinks, with prices falling slightly between December 2017 and January 2018, having risen in the same period a year ago.

"These downward effects were offset by prices for a range of recreational and cultural goods and services, with prices falling by less than they did a year ago. The main upward contribution came from admission prices for attractions such as zoos and gardens, with prices falling by less than they did last year."

The data for January mean the Bank of England has been overshooting its target of 2 per cent for 12 straight months.

Last week the Bank warned interest rates might increase sooner and faster than expected to keep inflation under control amid stronger global economic conditions.

Thomas Wells, who runs the Smith and Williamson Global Inflation Linked Bond fund, said the latest inflation figures hinted at a dark time ahead for the UK economy.

He said: "UK inflation remains elevated, and with CPI remaining at 3 per cent, there is a good probability that the Bank of England won’t be able to get CPI inflation back to the 2 per cent target this year.

"In our minds, one of the most likely scenarios from here is one of low or mediocre GDP growth but still elevated levels of UK inflation. This is a disaster for households, many of which are about to be clobbered with inflation-busting increases for bills such as council tax."

Below average GDP growth and above target inflation is a scenario economists call "stagflation", which presents a dilemma for the Bank of England.

Inflation remaining considerably above target would boost the case for the central bank to put rates up, as higher interest rates are deflationary, but weak GDP growth would likely incline the central bank to delay interest rate rises, as higher rates has a negative impact on economic growth.

Ben Brettell, senior economist at Hargreaves Lansdown, said economists had expected inflation to fall in December, and the fact that it has not "adds further weight to the case for higher interest rates".