UK prices ‘to keep rising’

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-fuelled fall in the pound, official data showed yesterday.

UK prices ‘to keep rising’

Consumer prices rose 1.8% compared with a year earlier, picking up from 1.6% in December, and prices paid by factories jumped by more than 20%.

The Bank of England expects inflation to approach 2.7% by the end of the year while many economists say it will go above 3%, putting to the test the BoE’s decision to keep interest rates at a fraction above zero.

Stronger inflation will strain the spending power of British households who have so far helped the economy withstand the shock of last June’s vote to leave the EU.

“We’re only seeing the thin end of the wedge in terms of inflation,” said chief executive of consultancy Retail Economics Richard Lim.

He said 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% by the end of the year,” he said.

A Reuters poll of economists, published yesterday, suggested inflation will average 2.6% this year and next — similar to the BoE’s forecasts.

The pound’s fall is starting to hit consumers, whose spending has helped the British economy to grow since the vote. It is down about 17% against the dollar and 11% against the euro since the Brexit vote

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.

However, 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.

Excluding oil prices and other volatile components such as food, core consumer price inflation held steady at 1.6%, confounding economists’ expectations for a rise to 1.8%. Retail price inflation also rose to its highest since June 2014, at 2.6%.

  • Reuters

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