UK inflation rate rises to highest in a year on motor fuel

17/02/2016 07:52 AST

UK inflation climbed to its highest in a year in January, driven by motor fuels, food and clothing. Consumer prices rose an annual 0.3 per cent following a 0.2 per cent gain in December, in line with the median forecast of economists in a Bloomberg survey. Core inflation, which excludes volatile food and energy prices, slowed to 1.2 per cent from 1.4 per cent, the figures from the Office for National Statistics in London show.

Inflation remains well below the Bank of England’s 2 per cent target. With oil prices remaining near a 12-year low and pay pressures weakening, officials say that the economy doesn’t yet warrant a rate increase from a record-low 0.5 per cent. Clouding the economic outlook is the prospect of a referendum as early as June on Britain’s membership of the European Union, which may hurt investor sentiment and consumer confidence.

“There isn’t enough inflationary pressure to worry the BOE,” said James Knightley, an economist at ING Bank NV in London. “Indeed, with the upcoming Brexit vote uncertainty potentially risking a loss of economic momentum as firms pull back on imminent job hiring and investment, BOE policy will remain stable until after the referendum.”

Wage Growth
Central to the outlook for rates is pay growth, which has come off the boil in recent months despite unemployment reaching a decade low. The statistics office will report data on jobs and wages on Wednesday.

The main driver behind the pickup in inflation last month was motor fuel, which fell by 2.6 per cent compared with a 6.8 per cent decline a year earlier. Food prices also fell by less than they did in January 2015, as did clothing and footwear, while drink prices rose by more than a year earlier. These pressures were partially offset by air fares, which dropped 36 per cent following an upward surge in December.

The pound gained after the report and was trading at $1.4453 as of 11:03am in London, up 0.1 per cent from Monday.

In their February inflation report, BOE officials said they see inflation at 1.2 per cent in the first quarter of next year, down from a projection of 1.5 per cent in November.

On the month, consumer prices fell 0.8 per cent, with core prices declining 1 per cent. Separate figures show producer prices falling 0.1 per cent in January as input costs declined 0.7 per cent. House-price growth slowed to 6.7 per cent in December, with London easing to 9.4 per cent. For 2015 as a whole, UK house prices rose 6.7 per cent.

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