Consumer price inflation jumped to 2.3 per cent in February as the slump in the value of the pound since last year’s Brexit vote fed through into the cost of living.
According to the Office for National Statistics, the annual rate of inflation is now higher than the Bank of England’s 2 per cent target for the first time since November 2013.
The rate was up from 1.8 per cent in January and outstripped City expectations for an increase to 2.1 per cent
The news sent sterling up 0.45 per cent against the dollar to a three-week high of $1.2460. It was still trading higher at $1.2478 at market closing time in London.
The Bank of England expects the rate of inflation to hit 2.7 per cent this year, as prices respond to the 13 per cent slump in trade-weighted sterling since last June’s Brexit vote.
But other analysts have forecast that it will rise above 3 per cent in 2017 and could prompt the Bank of England to raise interest rates earlier than expected.
The Bank’s Monetary Policy Committee voted last week to keep rates on hold at 0.25 per cent and the Bank has suggested it will tolerate a time limited overshoot of its inflation target while growth is expected to slow due to Brexit-related uncertainty.
But one MPC member, Kristin Forbes, voted for a rate rise and the minutes of the meeting suggested some others could switch their vote if the prices data turned out stronger than expected.
In February the Bank’s Governor, Mark Carney, stressed the Bank’s tolerance for price rises was limited.
“The import price shock is hitting the economy much sooner than the MPC expected,” said Samuel Tombs, economist at Pantheon.
The ONS reported that the biggest contributors to the large monthly increase in the CPI rate in February were from transport (including fuel), recreation and food and non-alcoholic drinks.
Motor fuel prices rose 1.2 per cent in February and were up almost 20 per cent on a year earlier due to the jump in the import cost of dollar-denominated oil.
But core inflation, which excludes volatile items such as food and energy, rose to 2 per cent, up from 1.6 per cent in January.
Total average wage growth in the three months to January was 2.2 per cent, which implies that in real terms wages are now declining again.
“While there is little that can be done to prevent oil price rises and a falling pound driving up inflation, today’s figures reinforce the risks to living standards of weak wage rises, especially in the context of the recent slowdown in employment growth,” said Stephen Clarke, an analyst at the Resolution Foundation think tank.
Responding to the figures a Treasury spokesperson said: “The Government appreciates that families are concerned about the cost of living, and that is why we are cutting tax for millions of working people, increasing the National Living Wage to £7.50 per hour from next month, and freezing fuel duty for the seventh year in a row.”
Other data from the ONS showed factory input prices for factories rising by 19.1 per cent year on year in February and output prices up by 3.7 per cent.
Suren Thiru, economist at the British Chambers of Commerce, described rising inflation as a “key risk” to the UK’s growth prospects.
“Businesses continue to report that the rising cost of raw materials are squeezing margins, forcing many firms to raise their prices. Higher inflation is also likely to materially squeeze consumer spending in the coming months as price growth increasingly outpaces earnings growth,” he said.
Average house prices grew by 6.2 per cent in the year to January, up from 5.7 per cent in December.
There was slightly better news on the public finances, with ONS data showing government borrowing of £1.8bn in February, lower than the £2.1bn expected by the City and leaving the Government on track to meet its recent downwardly-revised 2016-17 full year target of £51.7bn.
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