Business World

Monday 26 February 2018

UK inflation rise bigger than expected

The rising cost of food, petrol and utility bills pushed the rate of UK inflation up to a higher-than-expected 3.7pc in December, official figures revealed today.

The Consumer Prices Index (CPI) annual rate of inflation surged to its highest level since April, up from 3.3pc in November, the Office for National Statistics (ONS) said. Economists were expecting the rate to rise to 3.4pc.

Prices increased by 1pc between November and December, in their biggest ever month-on-month rise since records began in 1996, the ONS added.

The rises were driven by a 1.6pc increase in the price of food - the highest rise for a November to December period - and 3.6pc rise in transport costs, the highest ever monthly increase on record.

The higher-than-expected rise in CPI will add to pressure on the Bank of England, which is tasked with keeping inflation at its 2pc target, to raise interest rates.

The Bank has battled with stubbornly high inflation all year, which it believes is being caused by temporary factors, such as spikes in commodity prices and January's VAT rise from 17.5pc to 20pc.

CPI has been above its 2pc target every month since November 2009.

The Monetary Policy Committee (MPC) has resisted raising its base rate of interest from its all-time low of 0.5pc despite growing pressure.

Jonathan Loynes, chief European economist at Capital Economics, said: "December's worse-than-expected UK consumer prices figures will do nothing to comfort those concerned that the MPC is neglecting its inflation-targeting remit.

"After all, the committee will have had the headline figures - showing CPI inflation rising from 3.3pc to 3.7pc - at its meeting last week."

The big freeze pushed up the price of vegetables in December as supplies were choked by disruption to the supply chain and crop damage.

The ONS said cauliflowers were particularly badly hit by the Arctic weather, which caused a shortage that led to a 75.6pc rise in prices.

There were price hikes across most bread and cereals, aggravated by the wildfires that wrecked Russia's harvest and caused the country to impose an export ban.

The price rises brought in by utility companies also started to feed through to consumers in December, with gas particularly badly affected, pushing up the cost of housing and household services by 1.4pc.

Petrol prices also continued to rise to £1.22 per litre, said the ONS.

Airfares were up by 41.8pc between November and December, compared to a 41.7pc rise in the same period a year ago.

But there was downward pressure on pricing from clothing and footwear, where prices fell by a higher-than-average 1.9pc as the havoc caused by the snow forced retailers to compete for sales.

Other measures of inflation also increased. The Retail Prices Index, which includes mortgage repayments, rose to 4.8pc from 4.7pc in November.

Sterling was around 1pc higher against the dollar today as traders factored in the chances of an earlier-than-expected rise in interest rates.

Howard Archer, chief European economist at IHS Global Insight, said there was now increased pressure on the Bank of England to take a stand against inflation, having kept its base rate at 0.5pc for 22 months.

He added: "There is clearly a growing likelihood that the Bank's Monetary Policy Committee will act earlier than the fourth quarter and possibly even before mid-year.

"The MPC could well decide that a small near-term interest rate hike would support its credibility by sending out the message that it is serious about its inflation mandate, but would not have a major dampening impact on growth."

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