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The Actuary The magazine of the Institute & Faculty of Actuaries

Inflation at highest level since June 2014

UK consumer price inflation was at 1.8% in January, up from the 1.6% rate recorded in December last year, according to figures from the Office for National Statistics (ONS) released today.

Increase was less than many were expecting ©Shutterstock
Increase was less than many were expecting ©Shutterstock

This is the highest recorded rate since it was 1.9% two-and-a-half years ago, with the rise largely due to higher prices for motor fuels, which increased by 3.4% between last December and January.

Although this is lower than many economists’ expectations of a 1.9% rise in prices, it marks the third consecutive monthly inflation increase since October, with the trend expected to continue.

PwC senior economic adviser, Andrew Sentance, said: “UK inflation has picked up again this month to its highest level since 2014, but the increase was less than many were expecting. The impact of rising petrol and food prices was dampened by discounts on clothing and footwear.”

"The trend is clearly towards higher inflation, however, and is likely to be around 3% and possibly even higher. Rising energy prices and the weakness of the pound are the main factors behind this expected increase.

"The continued rise in inflation will squeeze consumer spending and dampen growth in 2017 and 2018, but despite this we still expect GDP to rise by around 1.5 % this year and next."

Consumer price inflation since June 2014

Source: ONS
Source: ONS

The rising inflation rate is now close to the Bank of England’s 2% target, and is being driven by the decreased value in Sterling, which has fallen around 12% on a trade-weighted basis since last June’s referendum result, according to Hargreaves Lansdown’s senior economist, Ben Brettell.

He said: “Producers are facing sharply higher input costs – up 20.5% on a year earlier. It’s almost unthinkable that cost increases of this magnitude can be fully absorbed, leaving firms with little choice but to pass at least some of the burden onto consumers.

“By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short-term.”