UK inflation at six-month high in January as fuel prices rise

British inflation unexpectedly rose to a six-month high in January, pushed up by higher petrol prices and a smaller-than-usual drop in airfares, official data showed on Wednesday.

UK inflation in January rose to a six-month high as petrol and house prices rose, official figures show.

The Consumer Prices Index (CPI) stood at 1.8 per cent last month, up from 1.3 per cent in December.

“The rise in inflation is largely the result of higher prices at the pump and airfares falling by less than a year ago, official data showed.

The rise is ahead of economists’ CPI forecast of 1.6 per cent in January.

CPI remains below the Bank of England’s 2 per cent target for inflation. Wednesday’s inflation data pushed the value of the pound above $1.30. Versus the euro, the pound had started the day down 0.25 per cent but rose back to trade flat against the single currency.

However, some analysts said that the new figures were unlikely to “move the dial” on the central bank’s next decision on interest rates in March.

The pound briefly strengthened by as much as a quarter of a cent against the US dollar following the figures, which showed consumer prices rose at an annual rate of 1.8 per cent compared with 1.3 per cent in December, not far off the Bank of England’s 2 per cent target.

A Reuters poll of economists had forecast a rate of 1.6 per cent. While inflation remains modest by historical standards, the figures hinted at a slightly stronger squeeze on household budgets.

The BoE said in January that it expected inflation to run below its target through 2020, bottoming out at around 1.2 per cent in the third quarter of this year. The Office for National Statistics also said British house prices rose in December at the fastest annual pace in just over a year, adding to signs of a rebound in confidence in the market since Prime Minister Boris Johnson’s election victory that month.

“While CPI inflation rose for the first time in six months, the inflation figures were in line with the Bank of England’s expectations, so they are unlikely to move the dial on the outlook for interest rates,” said Ruth Gregory, senior UK economist at consultancy Capital Economics.

New finance minister Rishi Sunak said British families had been left better off from low inflation and strong wage growth over the past 18 months. Fuel prices were up 4.7 per cent compared with a year earlier, marking the biggest rise since November 2018, the ONS said.

“The rise in inflation is largely the result of higher prices at the pump and airfares falling by less than a year ago,” ONS statistician Mike Hardie said.

“In addition, gas and electricity prices were unchanged this month, but fell this time last year due to the introduction of the energy price cap.”

A measure of core inflation, which excludes energy, fuel, alcohol and tobacco, rose to 1.6 per cent from 1.4 per cent in December.

The ONS figures also suggested more pressure in the pipeline for consumer prices.

Manufacturers’ raw-material costs rose 2.1 per cent in annual terms last month, the biggest increase since April, which reflected a surge in precious metal prices, particularly for palladium, used in catalytic converters for cars. The Reuters poll had pointed to a 0.1 per cent fall.

Manufacturers increased the prices they charged by an annual 1.1 per cent compared with a forecast of a 1.0 per cent rise.

The ONS also said house prices in December rose by an annual 2.2 per cent across the United Kingdom following a 1.7 per cent rise in November, marking the strongest rise since November 2018.

“Annual house prices grew across all regions of the UK, the first time this has happened in nearly two years, with London seeing its strongest growth since October 2017,” Hardie said. Prices in London alone rose by 2.3 per cent.

Britain’s economy flat-lined in the final three months of 2019, when the country was in a deadlock over Brexit that was only broken by Prime Minister Boris Johnson’s December election victory, leading to some signs of a recovery early this year.

Official figures released showed zero growth in the fourth quarter compared with the third, matching the median forecast in a Reuters poll of economists. In annual terms, growth was 1.1 per cent, stronger than the poll forecast of 0.8 per cent after upward revisions to growth in some previous quarters. However, the last time annual growth was weaker for a calendar quarter was in mid-2012.

“This is a mucky figure with the true sense of the UK economy’s performance occluded by the election of December 12,” said Jeremy Thomson-Cook, chief economist at payments provider Equals Group.

“More forward-looking data... are more optimistic, and while outright optimism would be misplaced, upgrades to previous quarters are well received.”

The data also showed quarterly growth in household spending - which has helped drive Britain’s economy for most of the period since the 2016 Brexit referendum - was the slowest in four years, rising by just 0.1 per cent.

Business investment dropped 1.0 per cent over the same period, the biggest fall since late 2016. There have been previous signs that consumers reined in their spending in late 2019, and industry figures published earlier on Tuesday suggested only a modest increase in January.

Agencies