19th January 2016
UK inflation reached an 11-month high of 0.2% in December, but as it remains so close to zero analysts say there is little pressure on the Bank of England to raise rates.
It follows year-on-year dips of 0.1% in both October and September.
The increase was driven by higher air fares, but held back by falling petrol and diesel prices, food prices and a smaller-than-usual increase in alcoholic drinks and tobacco.
Howard Archer, chief UK and European economist at IHS Global Insight says that air fares are “notoriously volatile” and this impact is likely to unwind in January.
Ben Brettell, senior economist at Hargreaves Lansdown, says: “UK inflation reached its highest level since January 2015, albeit that level is just 0.2%. This continues the trend of inflation being at or very close to zero and places little pressure on the Bank of England to lift interest rates.
“The Bank’s most recent minutes reiterate its expectation for inflation to increase modestly in the coming months, though they also note that continued weakness in the oil price makes it likely this will be more gradual than previously forecast.”
Brettell adds: “Core inflation, which strips out volatile components like food and energy, rose to 1.4% in December from 1.2% the previous month. If this upward trajectory continues it could offer some comfort to those hoping for a rate rise. However, other economic data has been weak recently – wage growth is predicted to have slowed again when figures are released tomorrow, and productivity remains a puzzle. Recent industrial production figures disappointed, suggesting the UK economy decelerated toward the end of 2015, and is still heavily reliant on consumer spending.
“Gertjan Vlieghe this week became the latest MPC member to dampen expectations of a rate rise in a very ‘dovish’ speech, noting that ‘the appropriate real interest rate for the economy might be very low for years to come’. All in all, those hoping for higher rates on this side of the Atlantic shouldn’t hold their breath.”
Andy Scott, economist at HiFX, says: “Sterling rose by one cent against the Dollar and around 1% against the Euro on Tuesday, following the release of higher than expected UK inflation data. With the Pound having fallen fairly consistently over the past six weeks due to the Bank of England signalling low inflation would mean rates staying on hold for longer; the news of a pickup in consumer prices gave a reason for the market to buy Sterling.
“Annual inflation rising just 0.2% is far from a game changer in terms of the outlook for UK rates to remain on hold into 2017, but it comes at a time when oil prices have fallen to their lowest in over a decade. This could be indicating that the continued UK economic growth is giving companies the confidence to raise prices, despite CPI having been around zero for the majority of 2015.
“The recent decline in sterling, which is down 8% against the Dollar, and is almost flat against the Euro versus the beginning of last year, may start to feed through into CPI. At best though, it seems likely to prevent it turning negative with deflationary pressures spreading across the globe, especially in emerging economies whose currencies have plummeted in some cases by 30% or more in the past year.
“Sterling’s recent sharp fall has been exasperated by the volatile start to the year, feeding concerns over the ‘Brexit’ risk. We expect it to start to stabilise and strengthen in the months ahead, particularly against the Dollar as further rate hikes from the Fed become less and less likely.”