UK inflation hits highest level since mid-2014

Consumer prices in Britain rose 1.6 per cent in December compared to a year earlier.
Consumer prices in Britain rose 1.6 per cent in December compared to a year earlier. PHOTO: AFP

LONDON (REUTERS) - British inflation rose more strongly than expected in December to hit its highest level since mid-2014, propelled by higher air fares and the Brexit-fuelled fall in the value of sterling.

Official data showed consumer prices rose 1.6 per cent compared with a year earlier, the Office for National Statistics said, above economists' expectations in a Reuters polls for a 1.4 per cent annual rise. That was up from 1.2 per cent in November.

The Office for National Statistics said rising air fares and food prices, combined with a smaller fall in petrol prices than in December 2015, were behind the increase.

The Bank of England is watching closely how quickly prices pick up as it tries to gauge the likely impact on consumer spending which has helped Britain's economy to withstand the shock of June's decision to leave the European Union.

The BoE forecast in November that inflation will exceed 2.7 per cent by the end of this year as sterling's big fall after the Brexit vote pushes up the price of imports. But since then the pound has weakened further - falling below US$1.20 (S$1.71) on Monday to hit one of its lowest levels in more than 30 years - and international oil prices have risen.

Many private-sector economists predict that inflation will hit 3 per cent, possibly as soon as this summer. The pound is down almost 20 per cent against the US dollar and 13 per cent against the euro since the June referendum.

Bank of England Governor Mark Carney has said there are limits to how much of an overshoot the central bank will tolerate above its 2 per cent inflation target although financial markets are suggesting investors see little chance of a rate hike before 2019.

On Monday, Mr Carney said Britain's recovery was increasingly reliant on consumers which made it vulnerable to the risk of a fall in spending power. Retail price inflation - tracked by British inflation-linked government bonds - rose by 2.5 per cent in December compared with the same month in 2015, the sharpest increase since July 2014.

Excluding oil prices - which have risen sharply in recent months - and other volatile components such as food, core consumer price inflation rose by 1.6 per cent, compared with economists' expectations for 1.5 per cent.

Data on factory gate prices underscored the inflationary pressures in the pipeline. Output prices rose 2.7 per cent, their fastest annual rise since March 2012 although a bit weaker than forecasts of a 2.9 per cent increase in the Reuters poll. Prices paid by factories for materials and energy rose by 15.8 per cent, the biggest jump since September 2011.