UK Inflation Rises 2.3%, Shocks Economist

British inflation breached the Bank of England’s 2% target last month. The 2.3% rise in consumer prices represents the biggest increase since three and a half years ago. January’s inflation was at 1.8%.

This month’s data also marks the start of the usage of CPIH. CPIH includes owner-occupier housing costs (costs associated with living, maintaining and ownership of house) to measure inflation.

Ruth Gregory, an economist at Capital Economics, said, “If the economy continues to hold up well as we expect, interest rates could be rising rather sooner than the markets have been anticipating.

However, most economists expect the Bank of England to keep rates at the current all-time low of 0.25% until the Brexit uncertainties clear up. The Bank of England has also noted that it will allow an overshoot in inflation to prevent loss of jobs.

Current inflation is now at the same rate as in wage growth. This increase in consumer prices is raising pressure on household expenditure.

Chris Williamson, an economist at Markit, said, “It remains likely that policymakers will adopt an increasingly dovish tone in coming months, despite the rise in inflation as the economy slows due to consumers being squeezed by low pay and rising prices.”

Last week, the interest rate setting committee of Bank of England had a meeting. One voted for an increase in the interest rates to prevent inflation from rising to a threatening level.
The Bank of England expects inflation to peak at 2.8% in the 2nd quarter of 2018, but economists predict it will hit 3%. Transport costs spiked up because of rising fuel costs and were the primary driver of inflation for this month. If oil and food prices were excluded, the core price inflation would have risen to 2.0%.

Ben Bratell who is a senior economist at Hargreaves Lansdown concluded that the transport costs increased because of the depreciation of the British pound against the U.S. dollar. Imported inflation for food is also becoming a real threat as a result of the British pound depreciation since its decision to exit the European Union.
Fortunately, the supermarket industry has a price war which is limiting the full potential of food price increases.

Dan Hanson, a Bloomberg Intelligence economist, said, “Above-target inflation is likely to be a theme of U.K. economic performance for the foreseeable future.”
The sharp rise in consumer prices gave fuel for the British pound to appreciate 0.8% against the dollar.

Economists have noted that manufacturers are inclined to increase their prices as numbers in February showed producer input prices rising 19.1% on a year-on-year basis.

A spokesperson for the British Treasury 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 pounds per hour from next month and freezing fuel duty.”

March 29 is an important day for Britain as it will formally trigger two years of discussions on the Brexit decision.