Weak sterling spurs UK inflation rate rise

UK inflation rate rises to its highest level in nearly three years, with further increases predicted by experts. What are the root economic causes of this rise?

Pound coins illustrate a 14 Feb 2017 article about rising UK inflation rates
The UK inflation rate rose to 1.8 per cent in January to hit a two-and-a-half-year high, according to official data on Tuesday from the Office for National Statistics (ONS).The increase in the consumer price index was marginally lower than analysts had been predicting and remained below the Bank of England target of two per cent. Nevertheless, it meant that inflation was running at the same rate as wage increases, raising fears that it could dent consumer confidence and, hence, spending.Sterling's fall since the EU referendum and the rise in fuel prices were behind the rate rise, which was up from 1.6 per cent in January and represented the highest rate since June 2014.Separate ONS figures for the producer price index showed that input prices paid by manufacturers for imported raw materials and fuel increased by more than a fifth in January, the highest rate since September 2008. As a result, output prices rose by 3.5 per cent, which is likely to push up consumer price inflation in the months ahead.Mike Prestwood, ONS head of inflation, said "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."
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The ONS reported that a rise in the cost of imported foods caused by sterling's fall could have been behind a significant slowdown in the fall of food prices. "Following a sustained period of deflation of food prices since mid-2014, during which the 12-month rate was often lower than negative three per cent, the rate has increased for four consecutive months, reaching negative 0.4 per cent in January," the ONS said. "This is the highest it's been since June 2014."Ian Stewart, chief economist at Deloitte, pointed out that the UK was not the only economy facing higher inflation. “Rising inflation is not just a UK phenomenon and is not just currency-related," he said."Prices are rising across the West, as higher fuel and other commodity prices feed through to consumers. In fact, German prices have risen faster than UK prices in the last year and, last month, Germany’s inflation rate was higher than the UK’s (at 1.9 per cent)."Ben Brettell, senior economist at Hargreaves Lansdown, said there were fears that inflation would overtake wage rises later this year, resulting in real incomes starting to fall again."Sterling has fallen around 12 per cent on a trade-weighted basis since last June’s referendum and, as a result, producers are facing sharply higher input costs – up 20.5 per cent on a year earlier."It’s almost unthinkable that cost increases of this magnitude can be fully absorbed, leaving firms with little choice but to pass at least some of the burden onto consumers. By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short term."Andrew Sentance, senior economic adviser at PwC, believes the inflation rate could hit three per cent by the end of 2017. “The trend is clearly towards higher inflation," he said, "and we should expect the rate of price increases to rise above the two per cent Bank of England target in the next few months."By the end of this year, inflation is likely to be around three per cent and possibly even higher. Rising energy prices and the weakness of the pound are the main factors behind this expected increase."
For more Relocate news and features on UK finance, click here and for more on business and enterprise, click hereRead analysis of what the vote to leave the EU may mean for for the global mobility industry in Brexit is a reality – a new era for global mobility? by Relocate Global's managing editor, Fiona Murchie.Keep informed by subscribing to our newsletters and publications
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