Fuel prices push UK inflation to six-month high

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% last month, up from 1.3% in December, the Office for National Statistics said.

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

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

CPI remains below the Bank of England’s 2% 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% 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.

Why is inflation rising?

Mike Hardie, head of inflation at 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. 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.”

Fuel prices were up 4.7% compared with a year earlier, marking the biggest rise since November 2018. Energy regulator Ofgem’s cap on energy bills meant that the average household could not be charged more than £1,137 annually for their gas and electricity.

The ONS also said that annual house prices rose across all regions of the UK, the first time this has happened in nearly two years.

The cost of living fell in January. Before you get too excited though – it normally does, compared with a month before, due to January sales and a slowing demand for goods and services following the Christmas break, which pulls prices down on average.

This year, however, electricity and gas bills didn’t fall as they did in 2019 when the energy price cap kicked in. And discounts in the January sales for clothing and footwear weren’t as deep as they were a year ago. That meant they exerted less downward pressure on the average cost of living than most had expected.

In turn, that means there is now less of an expectation that the Bank of England will have to try and support the economy by cutting interest rates any time this year.

The most recent wages data released on Tuesday showed that average weekly wages in the UK reached their highest levels since before the financial crisis. Weekly pay reached £512 in the three months to December, which – adjusting for inflation – is the highest since March 2008.

Excluding bonuses, earnings grew at an annual rate of 3.2% in the three months to December.

Inflation is one key factor the Bank of England’s Monetary Policy Committee (MPC) considers when setting the “base rate”. That influences what interest rate banks can charge people to borrow money, or what they pay on their savings.

If it thinks inflation is likely to be below 2%, it may cut interest rates to lower the cost of borrowing and therefore encourage spending.

‘Unlikely to move the dial’

Ruth Gregory, senior UK economist at Capital Economics, said that the latest inflation figures were “unlikely to move the dial on the outlook for interest rates”.

She said: “For the MPC, the fact that inflation is in line with its projections provides another reason not to cut interest rates in the near-term.” The rate currently stands at 0.75%. The MPC is next due to meet on 26 March.

Robert Alster, head of investment services at Close Brothers Asset Management, said that a similar cautious approach might be taken by new Chancellor of the Exchequer Rishi Sunak in his March Budget.

He said: “Rishi Sunak is likely to use the Budget to announce a welcome boost to longer-term investment, but abide by the fiscal rules for short-term spending until the fog has cleared” around Brexit.

Source