Inflation hits 1.8% as post-Brexit pound weakness feeds through to high street

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UK consumer price inflation jumped to 1.8 per cent in the year to January, from a rise of 1.6 per cent in the year to December, as the slump in the pound since the Brexit referendum continued to trickle through to the high street.

According to data from the Office for National Statistics published on Tuesday, January’s rise was the biggest since June 2014. But the jump narrowly missed analyst expectations for a 1.9 per cent increase, just below the Bank of England’s official 2 per cent target.

The pound fell against the dollar after the data was released and was recently trading back to $1.25.

The ONS said that the main contributors to the increase in the rate were rising prices for motor fuels and to a lesser extent food prices, which were unchanged between December 2016 and January 2017, having fallen a year ago. These upward pressures were partially offset by prices for clothing and footwear, which fell by more than they did a year ago.

Analysts said that despite Tuesday’s figure missing expectations, they still expect inflation to rise rapidly in coming months.

“With Britain seemingly heading for a hard Brexit, it’s likely we will see the pound continue to wobble over the next two years, resulting in higher inflation in the short term. Indeed, price rises are expected to reach 2.8 per cent by the end of the year,” said Tom Stevenson, an investment director at Fidelity International.

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

“As retailers’ hedging contracts continue to unwind we expect inflation will accelerate sharply in the coming months, hitting 3 per cent by the end of the year,” he said.

“On its current trajectory, real earnings are likely to start shrinking by the summer which will bear down on discretionary spending.”

Suren Thiru, head of economics at the British Chambers of Commerce, described higher inflation as “a major headache for businesses as it increases their cost base and weighs on investment decisions”.

The Bank of England expects inflation to breach 2 per cent by the end of March and peak at 2.72 per cent in the first quarter of 2018, before gliding down to 2.4 per cent by the end of 2019.

In its latest minutes, the Bank’s Monetary Policy Committee (MPC) said it was prepared to tolerate an overshoot of its target for the three-year forecast period in order to support growth as the economy slows over the next two years during the Brexit negotiations.

But it added “some members” of the MPC are reaching the limits of their tolerance for inflation, implying that they could soon start voting for rate rises if inflationary pressures seem to be stronger than expected.

The value of trade-weighted sterling has slumped by around 12 per cent since last June and this has prompted a sharp rise in factory input prices.

Economists expect these prices to steadily feed into shop prices over the coming months, pushing up the official Consumer Price Index (CPI).

The UK exited a period of mild deflation at the end of 2015 and the CPI has been rising steadily over the past 12 months.