Higher food and fuel prices propel inflation

 

Rate nears BoE target of 2% as it hits level not seen in more than two years

The rising cost of fuel and food pushed inflation to its highest level since June 2014 last month, according to the Office for National Statistics.

The consumer prices index was 1.8 per cent in January, against a figure of 1.6 per cent in December. Analysts had forecast January’s figure as 1.9 per cent and the Bank of England’s target is annual inflation of 2 per cent.

“The latest rise in CPI was mainly due to rising petrol and diesel prices, along with a significant slowdown in the fall in food prices,” said Mike Prestwood, ONS head of inflation. “The costs of raw materials and goods leaving factories both rose significantly, mainly thanks to higher oil prices and the weakened pound.”

Over the past three years, food and non-alcoholic drink prices have fallen sharply as supermarkets engaged in a price war. The rising cost of imported food has halted this trend but food and non-alcoholic drinks are still 6 per cent cheaper than they were three years ago.

Higher prices for fuel and food were partially offset by a fall in the price of clothes and footwear, which declined by 4.2 per cent between December and January, a larger month-on-month fall than a year earlier. This left the core rate of inflation, which strips out food and fuel, at 1.6 per cent.

“The downside surprise entirely reflected a pullback in clothing inflation,” said Samuel Tombs of Pantheon Macroeconomics. “December’s [inflation] rate had been boosted by an earlier than usual start to winter discounting . . . last year, so it always was unlikely to be sustained.”

Inflation is expected to rise this year as the effect of the weaker pound feeds through to consumer prices. The exchange rate has already had a noticeable impact, pushing up prices that companies pay for inputs to the production process.

Producer input prices rose by 20.5 per cent in the year to January 2017, from 17 per cent in December, the highest figure since September 2008. “The continued rise in factory gate prices confirms that inflationary pressures in the supply chain are intensifying,” said Suren Thiru, head of economics at the British Chambers of Commerce.

The BoE expects consumer price inflation to peak at about 2.8 per cent early next year. But there is uncertainty about exactly how much of the rise in input prices will be passed on to consumers and how quickly this will happen. For the time being, members of the bank’s rate-setting Monetary Policy Committee are happy to allow inflation to exceed the BoE’s target, because they judge this will be a temporary effect caused by the fall in the value of sterling.

Most members of the MPC do not believe that rising prices will also push up pay because they think there is still spare capacity in the labour market, which will hold wage growth down.

However, Kristin Forbes, one of the most hawkish members of the committee, said last week she was becoming “uncomfortable” with ultra-low interest rates. Prof Forbes is to step down from the MPC at the end of June.

The ONS will publish figures today showing changes to employment and wages in the final quarter of 2016.

The retail prices index – which is no longer an official statistic because of methodological problems but is still used in some calculations, such as government bonds – increased to 2.6 per cent from 2.5 per cent in December.

Inflation has been boosted by the depreciation of sterling, which has fallen by 17 per cent from its November 2015 high. But “rising inflation is not just a UK phenomenon and is not just currency-related”, said Ian Stewart, chief economist at Deloitte consultancy.