UK December inflation edges higher on fuel costs, air fares

[LONDON] A surge in air fares produced a modest pickup in UK inflation in December as lower food prices kept the rate well below the Bank of England's target.

Prices rose an annual 0.2 per cent, as forecast by economists in a Bloomberg survey, following a 0.1 per cent gain in November. Core inflation, which excludes volatile food and energy prices, accelerated to 1.4 per cent, the highest in a year, the figures from the Office for National Statistics show.

With oil at a 12-year low and pay pressures weakening, BOE officials appear to be in no hurry to follow the Federal Reserve in raising interest rates from a record low. Gertjan Vlieghe, the newest member of the Monetary Policy Committee, said on Monday that the lack of price pressure warranted patience.

That view may be reinforced when Governor Mark Carney delivers his first public comments this year in a speech at noon, after the International Monetary Fund updates its global forecasts. China, the second-largest economy, had its weakest quarter since 2009 at the end of last year.

Upward pressure on inflation came from motor-fuel costs, which fell less last month than a year earlier, and from air fares, which jumped 46 per cent on the month, the largest increase for a December since 2002. Those offset downward pressures from food, drink, alcohol and tobacco.

Inflation averaged zero last year, the weakest reading since 1950, as supermarket wars drove down food prices and fuel costs tumbled. Inflation will only reach 1 per cent by the fourth quarter, just half of the BOE's target of 2 per cent, EY's Item Club said in a report this week.

Rate Bets A growing number of forecasters now say the BOE will refrain from raising rates until the fourth quarter, having previously anticipated a move in the first quarter. Interest- rate forwards show the benchmark staying at 0.5 pe rcent until at least the first quarter of 2017.

Wage growth, a key metric for BOE policy makers, probably slowed to 1.8 per cent in the three months through November, the weakest since January, according to a Bloomberg survey. Data on pay and employment will be released on Wednesday.

Retail-price inflation accelerated to 1.2 per cent in December. The RPI is used among other things to calculate interest payments on inflation-protected gilts.

Separately, the statistics office said input prices at factories fell 0.8 per cent on the month and were down 10.8 per cent from a year earlier. The price of goods leaving factory gates declined 0.2 per cent on the month and by 1.2 per cent on the year.

House-price growth picked up to an annual 7.7 per cent in November from 7 per cent in October, with London accelerating to 9.8 per cent from 7.7 per cent.

BLOOMBERG