UK inflation reaches 2.3%, shooting past Bank of England target

Pedestrians cross the road at Oxford Circus and underneath British union flags in London. Consumer prices in Britain rose by a stronger-than-expected 2.3 per cent in annual terms, the largest increase in over three years.
Pedestrians cross the road at Oxford Circus and underneath British union flags in London. Consumer prices in Britain rose by a stronger-than-expected 2.3 per cent in annual terms, the largest increase in over three years. PHOTO: BLOOMBERG

LONDON (REUTERS) - British inflation last month shot past the Bank of England's (BoE) 2 per cent target for the first time since the end of 2013, potentially adding to uneasiness among some officials at the central bank about keeping interest rates near zero.

Consumer prices rose by a stronger-than-expected 2.3 per cent in annual terms, the biggest increase in nearly 3½ years and up sharply from 1.8 per cent in January, the Office for National Statistics said on Tuesday.

Last week, one of the BoE's policymakers voted for a rate increase, given the rise in inflation and no sign of the economic slowdown expected after Britain voted to leave the European Union (EU). Other policymakers said it would not take much more news about rising inflation or growth to make them follow suit.

Economist Ruth Gregory at Capital Economics, said most BoE policymakers were likely to vote to keep rates steady for now, given the uncertainty ahead for Britain as it prepares to quit the EU.

But the latest figures would do little to reassure those BoE rate-setters who have become more concerned about higher inflation, she said. "If the economy continues to hold up well as we expect, interest rates could be rising rather sooner than the markets have been anticipating," Ms Gregory said in a note to clients.

The increase in annual inflation from January to February was the biggest since October 2012, the ONS said.

Economists taking part in a Reuters poll had expected inflation would rise to 2.1 per cent.

Sterling rose against the US dollar to its highest level in three weeks after the data. British government bond prices fell.

Britain's vote to leave the EU last June triggered a slide in the value of the pound, pushing up the price of imported goods that is expected to be felt over the coming years. Furthermore, global oil prices have risen, adding to the squeeze on the spending power of households.

The BoE has said it expects inflation will peak at 2.8 per cent in the second quarter of next year, but many economists say it is likely to hit 3 per cent. Inflation has also accelerated in the United States and elsewhere in Europe.

The ONS said transport costs, which were pushed up by rising fuel costs, were the biggest driver of inflation in February.

Also, food prices rose in annual terms for the first time in more than 2½ years. Excluding oil and other volatile components such as food, core consumer price inflation rose to 2.0 per cent, above the Reuters poll forecast of 1.8 per cent.