UK inflation rate hits 3.1%

British inflation unexpectedly rose to its highest level in nearly six years in November, tightening the post- Brexit vote squeeze on households whose spending is the main driver of the country’s economy.

Consumer price inflation hit an annual rate of 3.1% in November, pushed up by air fares, computer games and the price of chocolate, official data showed, reflecting the impact of the pound’s plunge after last year’s vote to leave the EU.

There were also signs that factories were under renewed price pressure as global oil prices rose. However, most economists said they thought the surge in prices for consumers was peaking.

Now that inflation is more than a percentage point above the Bank of England’s 2% target, governor Mark Carney will have to write a letter to finance minister Philip Hammond in February to explain what it is doing in response.

The UK economy has slowed sharply this year, falling behind a recovering eurozone, and it is expected to lose more ground in 2018 as the effects of the Brexit vote are felt by consumers and companies.

Nevertheless, the Bank of England raised interest rates for the first time in a decade last month. It said then that inflation was near its peak and would then fall slowly over the next three years to just above 2%. It also said a long-awaited pick-up in wage growth was likely next year.

The Bank of England is widely expected to keep rates unchanged at 0.5% tomorrow. Investors are watching mostly for signals from the central bank about how soon rates will rise again.

The pound rose to a session high against the dollar after the inflation figures and British government bond futures fell to their lowest level of the day, although the moves were limited.

Aberdeen Standard Investments chief economist Lucy O‘Carroll said inflation might be close to its peak but rising costs in the services sector could yet could push up overall prices.

“Further interest rate rises are definitely not off the table,” she said.

“The Bank of England has a tricky tightrope to walk. Too much inflation could threaten the bank’s credibility and therefore its grip on the economy. But they need to keep consumer spending, the engine of the UK economy, chugging along too.”

While inflation has jumped since the Brexit vote, wages have risen more slowly.

Reuters


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