UK Inflation Surpasses BoE Target

Annual inflation rose above the Bank of England’s (BoE) forecast for the first time since 2013, hitting 2.3 per cent in February. Consumer prices rose by 0.7 per cent, compared to an expected 0.5 per cent rise, marking the fastest rate of increase in three and a half years. Food prices increased for the first time in 31 months, and rising transport costs also contributed significantly to inflation.

Core inflation, which is calculated without volatile food and energy prices, also rose above expectations, rising 2 per cent year-on-year compared to forecasts of a 1.7 per cent rise. There are signs that the recent rises mark the beginning of a new trend. The producer price index, which tracks prices of materials and fuels for manufacturers, were 3.7 per cent higher than in February 2015. Output producer prices are an early signal of inflationary pressures which may lead to increased consumer prices further down the line.

Analysts stress the impact of the weaker pound on creating an ‘import price shock’, pointing out that the rise in the headline rate of inflation reflects a rise in core goods inflation, which includes commonly imported goods such as clothing and technological devices. James Athey, investment manager at Aberdeen Asset Management, has also said that the inflation rate will put more pressure on the BoE to raise interest rates. On the other hand, James Smith at ING suspects that concerns about growing inflation will be outweighed by concerns of slowing wage growth, which are now rising at the same rate of 2.3 per cent year on year. As a result, he argues that the BoE will be discouraged from adjusting interest rates.

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