UK inflation hits highest level since June 2014 as fuel costs soar

Inflation in Britain rose at the fastest pace in over two-and-a-half-years in January, although slightly less than analysts had expected, as the cost of fuel and food increased markedly.

According to data released by the Office for National Statistics (ONS) on Tuesday (14 February), inflation rose 1.8% year-on-year in January, up from the 1.6% reading recorded in December and higher than the 1.9% figure analysts forecast.

The reading meant inflation as measured by the consumer price index has reached its highest level since June 2014. On a monthly basis, inflation fell 0.5 last month, compared with a 0.5% increase recorded in the previous month and in line with analysts' expectations.

The report added 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, after declining a year ago.

However, the rising costs in food and fuel were partially offset by prices for clothing and footwear, which fell by more than they did a year ago.

The ONS said that sterling weakness, which has seen the pound fall by some 16% since the June Brexit vote, had contributed to increase in price across both categories.

However, Ian Stewart, chief economist at Deloitte, said the pound was not the only factor behind the increase in 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."

Data released by the RAC at the beginning of this month showed fuel prices reached a two-year high last month, with petrol and diesel increasing by an average of 2p a litre at the pumps.

Also, earlier this month the Bank of England (BoE) said it expects inflation to rise well above its 2% target for the next three years, peaking at 2.8% in the first half of 2018. The Bank added it does not believe wages will be able to keep pace with higher inflation, leading to squeezed household budgets.

"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," said Tom Stevenson, investment director for personal investing at Fidelity International.

"Indeed, price rises are expected to reach 2.8% by the end of the year.

"With inflation forecast to exceed the BoE's target this year, still slow wage growth and [Bank governor] Mark Carney showing no intention of raising rates any time soon, millions of households will begin to feel the financial squeeze in their pockets. Rising prices and relatively stagnant incomes are a painful combination."