UK inflation proves stickier than expected at start of 2018

[LONDON] British inflation unexpectedly held close to its highest level in nearly six years in January, highlighting the challenge the Bank of England will face as it tries to return price growth to target over the next two years.

Consumer price inflation remained at an annual rate of 3.0 per cent in January, unchanged from the month before, after reaching its highest since March 2012 in November at 3.1 per cent, the Office for National Statistics said.

The figure was above economists' average expectation in a Reuters poll for it to fall to 2.9 per cent.

The BoE surprised financial markets last week by indicating that it wanted to bring inflation back to target faster than before, aiming to return price growth to 2 per cent within two years rather than three.

BoE Governor Mark Carney and his colleagues on the Monetary Policy Committee said interest rates would need to rise sooner and by somewhat more than the BoE had previously expected.

This prompted markets to price in as much as a 70 per cent chance of a quarter-point rise in interest rates by May, and a roughly 50 per cent chance of a further increase in rates to 1 per cent by the end of the year - a level last seen in 2009.

Inflation has surged in Britain since the decision by voters in June 2016 to leave the European Union hammered the value of the pound and pushed up the cost of imports.

The combination of high inflation and limited wage growth - as well as uncertainty about the terms on which Britain will leave the European Union in 2019 - is expected to mean Britain's economy grows more weakly than other EU economies this year.

However, consumer price inflation is expected to start to wane as the peak impact from sterling's sharp fall in mid-2016 drops out of annual comparisons.

The historic measure of retail price inflation, which is still used to calculate payments on government bonds, student loans and many commercial contracts, edged down to 4.0 per cent from December's six-year high of 4.1 per cent - adding to pressure on the government's already stretched budget.

Tuesday's CPI data showed downward pressure on inflation from a slower pace of increase in the cost of fuel than a year ago. But the ONS highlighted a smaller than usual seasonal decline in the cost of visiting zoos and gardens as pushing up on price growth.

BoE Governor Mark Carney said last week that inflation could rise above 3 per cent before starting a slow descent.

The Office for National Statistics figures suggested less pressure in the pipeline for consumer prices.

Among manufacturers, the cost of raw materials - many of them imported - was 4.7 per cent higher than in January 2016, down from 5.4 per cent in December and the smallest increase since July 2016. Economists polled by Reuters had expected input prices to rise by 4.2 per cent.

Manufacturers increased the prices they charged by 2.8 per cent compared with 3.3 per cent in December, weaker than the consensus forecast of 3.0 per cent and the smallest increase since November 2016.

The ONS also said house prices in December rose by 5.2 per cent annual across the United Kingdom as a whole compared with 5.0 per cent in November. Prices in London alone increased by 2.5 per cent.

Mortgage lender Halifax reported last week that average house prices across Britain rose 2.7 per cent year-on-year in the fourth quarter of 2017, but fell on a monthly basis in both December and January.

REUTERS