UK inflation soared in February, rising from 1.8 per cent in January to 2.3 per cent, its highest rate since September 2013.
The shock rise in CPI, which was above the Monetary Policy Committee’s prediction, was due to core inflation, which rose from 1.6 per cent in January to 2 per cent in February, surpassing the consensus 1.7 per cent.
Ruth Gregory, UK economist at Capital Economics, says the economy is being affected by the import price shock much sooner than the MPC expected.
“The rise in the headline rate primarily reflected a 0.25 percentage point boost from a jump in core goods inflation – which includes, for instance, clothing, tech goods and recreational items – to 0.8 per cent in February, from 0.1 per cent in January. These goods are commonly imported. In addition, the contribution to inflation from motor fuel increased by 0.1 percentage points. A jump in food inflation to 0.2 per cent, from -0.5 per cent in January, also boosted the headline rate by nearly 0.1 percentage points.”
While inflation is unlikely to rise much further in March due to when Easter falls, it could jump in April as electricity and natural gas prices rise, Gregory says.
“We continue to think that CPI inflation will average about 3 per cent this year and peak at about 3.5 per cent towards the end of 2017. Inflation therefore looks set to exceed the MPC’s forecast for an average rate of just 2.4 per cent this year,” Gregory adds. “But with the pickup chiefly reflecting sterling’s depreciation rather than domestically-generated inflation and no signs yet that wage growth is tracking inflation higher, a majority of members likely will still vote to keep interest rates on hold this year.”
Ben Brettell, senior economist at Hargreaves Lansdown, says take-home pay is now outpaced by inflation.
“Today’s inflation bulletin from the ONS feels somewhat like Groundhog Day, as the fall in sterling continues to make its way through to the high street,” he says.
“Inflation at 2.3 per cent is now higher than the growth in average earnings (2.2 per cent), meaning real pay is officially shrinking. The interplay between these two numbers will be closely watched over the coming months. The UK economy relies heavily on consumer spending and a squeeze on household budgets would not be good news. As for the next few months’ inflation bulletins – expect more of the same.”