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Update: UK inflation hits highest level since mid-2014, pushed up by Brexit hit to pound
[LONDON] British inflation rose more strongly than expected in December to hit its highest level since mid-2014, propelled by the Brexit-fuelled fall in the value of sterling which looks set to hit consumers' spending power harder in the coming months.
Consumer prices rose 1.6 per cent compared with a year earlier, the Office for National Statistics said, above economists' expectations in a Reuters poll for a 1.4 per cent rise and up from 1.2 per cent in November.
"Inflation is back with a vengeance," said Tom Stevenson, investment director at fund managers Fidelity International.
"With more hints from the UK government that a hard Brexit is on the cards, we could see sterling fall even further in the lead-up to the prime minister pulling the trigger on Article 50. This will translate into further inflation in the short term."
Mrs May, who has said she will launch formal negotiations for leaving the European Union by the end of March, is due to say on Tuesday that Britain will not seek a deal that leaves it "half in, half out" of the bloc, according to extracts of her speech.
Rising air fares and food prices, combined with a smaller fall in petrol prices than in December 2015, were behind December's increase in inflation, the ONS said.
"Rising raw material costs also continued to push up the prices of goods leaving factories," ONS statistician Mike Prestwood said.
The Bank of England is watching closely how quickly prices pick up as it tries to gauge the likely impact on spending by consumers, which has helped Britain's economy to withstand the shock of June's decision to leave the European Union.
The value of the pound, which has tumbled about 20 per cent against the US dollar and 13 per cent against the euro since the June referendum - jumped after the inflation data was published, and British government bond prices fell .
The BoE has said it is neutral about which way interest rates might next move. It forecast in November that inflation will exceed 2.7 per cent by the end of this year.
But since then the pound has weakened further and international oil prices have risen. Many private-sector economists predict that inflation will hit three per cent, possibly as soon as this summer.
BoE Governor Mark Carney said on Monday that Britain's recovery was increasingly reliant on consumers which made it vulnerable to the risk of a fall in spending power. He has said there are limits to how much of an overshoot the central bank will tolerate above its two per cent inflation target.
Chris Williamson, an economist at IHS Markit, said the stronger-than-expected inflation figure for December would add to speculation that the BoE might start to consider the need for higher interest rates later in 2017.
Retail price inflation - tracked by British inflation-linked government bonds - rose by 2.5 per cent in December compared with the same month in 2015, the sharpest increase since July 2014.
Excluding oil prices - which have risen sharply in recent months - and other volatile components such as food, core consumer price inflation was 1.6 per cent, compared with economists' expectations for 1.5 per cent. Data on factory gate prices underscored the inflationary pressures in the pipeline.
Output prices rose 2.7 per cent, their fastest annual rise since March 2012 although a bit weaker than forecasts of a 2.9 per cent increase in the Reuters poll. Prices paid by factories for materials and energy rose by 15.8 per cent, the biggest jump since September 2011.