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UK inflation rose more than expected to 3 per cent in January, highlighting the challenge for the Bank of England as it contends with persistent price pressures and a weakened economy.
The annual rate of price growth was the highest in 10 months and above the 2.5 per cent recorded in December and the 2.8 per cent forecast by economists polled by Reuters, the Office for National Statistics said on Wednesday. It was also well above the recent low of 1.7 per cent in September.
The increase was driven by higher costs for private schools after the government imposed VAT on fees, higher costs for food and non-alcoholic drinks and air fares dropping less than usual in January, the ONS said.
The BoE said this month that price pressures were on “a bumpy path” as it forecast inflation would rise to 3.7 per cent in the middle of the year, propelled by higher global energy costs. The central bank said it expected inflation to later fall back to around its 2 per cent target.
UK wage growth excluding bonuses accelerated to an annual rate of 5.9 per cent in the three months to December, figures published on Tuesday showed. But economic growth has been weak, with official data last week showing a marginal expansion of 0.1 per cent in the three months to December, following the stagnation of the previous quarter.
Zara Nokes, Global Market Analyst at JPMorgan Asset Management, said: “Hot on the heels of strong wage data yesterday, this morning’s hotter-than-expected inflation print will raise alarm bells at Threadneedle Street.”
Services inflation, a key measure of underlying price pressures, rose to 5 per cent in January from 4.4 per cent in December, but was below economists’ expectations of 5.2 per cent.
Following the inflation figures, traders stuck to bets that the BoE would deliver two further quarter-point cuts in rates this year after lowering borrowing costs this month, but scaled back the chance of the first move coming in March to 20 per cent from 25 per cent.
The pound was flat at $1.262 following the data. The yield on the rate-sensitive two-year gilt rose 0.02 percentage points to 4.26 per cent.
Ruth Gregory, economist at the consultancy Capital Economics, said that concern at the BoE would be tempered by the role of air fares in January’s rise and the smaller than expected increase in services inflation.
“So domestic pressures do not appear stronger than the Bank had anticipated,” she said.
Responding to Wednesday’s figures, chancellor Rachel Reeves said: “Getting more money in people’s pockets is my number one mission. Since the election we’ve seen year-on-year wages after inflation growing at their fastest rate — worth an extra £1,000 a year on average — but I know that millions of families are still struggling to make ends meet.”
Mel Stride, shadow chancellor, said: “Today’s inflation figures mean further pain for family finances — and it’s thanks to the Labour Chancellor’s record tax hikes and inflation busting pay rises.”
BoE governor Andrew Bailey on Tuesday said the central bank had been able to cut interest rates three times since last summer owing to falling inflation and because “we are facing a weak growth environment in the UK”.
He added that the expected rise in inflation was among the “challenges” ahead for the BoE, as well as global uncertainty, and reiterated his intention to take a “gradual and careful” approach to interest rate cuts.
