UK CPI inflation
The UK year-on-year CPI inflation rate rose to 2.3% for February from 1.8% previously. Markets had been expecting a smaller increase to 2.1% and it was the highest reading since September 2013.
This is also the first time that inflation has been above the Bank of England’s 2% target rate since late 2013. The RPI inflation rate, used to index government benefits, increased to 3.2% from 2.6% previously.
The underlying annual rate increased to 2.0% from 1.6% previously and compared with expectations of a smaller advance to 1.8%. On a monthly basis, prices rose 0.7%, the highest increase for four years.
There was further upward pressure on food and transport costs for the month. Food prices also rose 0.3% over the year having registered annual declines for close to three years. In part, higher prices reflected adverse weather conditions in Europe which put upward pressure on vegetable prices and these pressures should gradually ease during the Spring period.
The recent decline in oil prices will also have some impact in easing upward pressure on prices in the short term with increases in input prices moderating slightly in February.
There will, however, still be wider concerns surrounding inflation trends, especially as the full impact of Sterling weakness has not yet been passed through into retail prices.
There was monthly upward pressure on prices in housing and household services with some increase in costs from hotel and restaurants. Higher transport costs will have a knock-on impact in raising prices in the economy throughout the next few months.
The Bank of England Monetary Policy Committee (MPC) maintained interest rates at 0.25% following last week’s policy meeting, but Forbes called for an immediate increase in rates given inflation trends. Some other members of the committee stated that only a small increase in inflation expectations could push them closer to recommending higher interest rates.
The latest UK inflation data will, therefore, tend to increase speculation that the Bank of England will move more quickly than expected to tighten policy through higher interest rates.
Sterling moved higher after the release with GBP/USD breaking above 1.2450 for the first time in 3 weeks while EUR/GBP declined to 0.8660.
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