UK inflation rises less than expected, producer prices soar

UK inflation in January rose to its highest level since June 2014, according to official figures published on Tuesday, though not quite as high as was expected.

The Office for National Statistics revealed that the consumer price index grew 1.9% in the year to January, up from 1.6% in December but slightly short of the 1.9% consensus forecast.

On a monthly basis CPI fell 0.5% in January, as expected and the same as the previous month.

The undershooting of forecasts came as core CPI, which excludes more volatile prices, remained at 1.6% for the second month in a row, short of an expected 1.7% rise.

This reflected a pull back in clothing inflation to zero, from 1.2% in December, while fuel and food prices rose strongly as expected.

Producer price inflation, meanwhile, surged to 20.5% from a revised previous 17% and well ahead of its 18.5% consensus forecast.

For CPI, the Bank of England’s 2.0% target is likely to be breached in coming months, with the central bank's own forecast for CPI inflation this year to hit 2.7% and then ease to 2.6% in 2018.

“Further upward pressure on prices looks inevitable in coming months as energy costs continue to climb and firms pass rising costs on to customers, pushing inflation up towards 3.0% in the second half of the year," said economist Chris Williamson at Markit.

Sam Tombs at Pantheon Macroeconomics noted that the slower than expected rise in CPI was due to December’s rate being boosted by an earlier than usual start to winter discounting by clothing retailers the previous year, and he had "little doubt that clothing and other retailers who rely on imports will push through big price increases over the coming months".

He pointed out that European Commission research found the proportion of retailers reporting that they will raise prices over the next three months picked up in January to its highest level since March 2011.

"We continue to expect CPI inflation to rise sharply over the coming months, reaching 3% in May and peaking at about 3.5% towards the end of 2017, as sterling’s depreciation boosts food and core goods prices and as energy firms hike prices," Tombs said.

Analyst Ipek Ozkardeskaya at London Capital Group said the rising inflationary pressures could fuel renewed interest rate and currency speculation.

"However, given the extraordinary times due to Brexit, the BoE Governor Mark Carney had clear stated that the bank is ready to tolerate a higher than otherwise inflation and would stay as accommodative as possible during the two-year Brexit negotiation period."

While Carney said last week that there may be an additional slack in the UK’s economy, Ozkardeskaya suggested the softer than expected inflation data could temporary revive the BoE doves but was unlikely to be sufficient to encourage a bearish reversal in sterling.

The pound fell back from its year-to-date high against the euro after the ONS announcement, also losing ground against the dollar.