UK inflation reaches its highest rate for two years

Consumer prices in the UK reached 1.8% in January which is its highest level since summer 2014.

Data from the ONS shows that inflation figures failed to reach the expectations of a 1.9% rise however is edging ever closer to the Bank of England target of 2%.

Shilen Shah, bond strategist at Investec Wealth & Investment, said: “Despite the headline CPI coming in slightly below consensus in January at 1.8% there are clear signs that inflationary pressures are building in the UK economy with import prices increasing by 20% y-o-y, with crude oil leading the charge.

“The Bank of England’s currently neutral stance is significantly supported by its latest estimate about the amount of spare capacity in the economy, however if the path of CPI is stronger than it currently estimates, we may eventually see a stronger reaction from the central bank.”

The ONS claim that the rising prices of motor fuels and “significant slowdown” in the fall of food prices have contributed to the high inflation levels.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose to 2.0% in the year to January 2017, compared with a 1.7% rise in the year to December 2016.

Mike Prestwood, head of inflation at ONS, added: “The latest rise in CPI was mainly due to rising petrol and diesel prices, along with a significant slowdown in the fall in food prices.

“The costs of raw materials and goods leaving factories both rose significantly, mainly thanks to higher oil prices and the weakened pound.”

These figures come after the sterling dropped to its lowest levels since 1985.

Agate Freimane, senior investment director at BrickVest, said: “It is unlikely that the latest inflation numbers will have a significant impact on commercial or residential real estate market, at least not in the short term.

“Typically inflation means higher construction costs, which would eventually lead to increase in real estate prices, however, since the Brexit vote, the demand for real estate, both commercial and residential, has softened, so it is unlikely that developers will immediately pass on the raising costs as a consequence of the inflation to the end customer.

“In the construction sector, the inflation has been driven by weak British pound affecting the price of imported materials.”

Calum Bennie, savings expert at Scottish Friendly, added: “Consumers are battling on two fronts as inflation rises and wage growth languishes. However, inflation is still relatively low, which means consumers can try to counteract this by shopping smarter and seeking better utility and mortgage deals.

“The greatest struggle is for savers who continue to suffer as there seems little prospect of a rise in interest rates in the near future. People looking to put money aside for several years might consider investment ISAs as an alternative to get better long term growth potential.”

And David Lamb, head of dealing at FEXCO Corporate Payments, said: “There is a good dose of irony in sterling’s reaction to Britain’s remorselessly rising inflation. With the Pound’s weakness unmasked as the villain of the piece, sterling duly responded today by plunging further.

“The trouble is inflation is rising at an anti-Goldilocks rate – neither bad enough nor mild enough. It’s not fast enough for the Bank of England to hike interest rates, nor slow enough to stop economists fretting about its growth-sapping erosion of consumers’ buying power.

“With average wages now rising only a shade faster than prices, the wheels could fall off the consumer boom that has so far powered the UK economy through much of the post-referendum turbulence.

“That uncertainty, coupled with the assumption that an interest rate rise is still some way off, continues to weaken sterling – which starts the vicious circle off again.

“Despite the Bank of England’s bullish growth forecasts for the UK economy, the Pound remains trapped in its awkward limbo. With the prospect of an interest rate rise looking as elusive as ever, it’s hard to see sterling snapping out of its daze any time soon.”


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Written by: Houseladder