Rising food and fuel prices pushed Britain’s inflation rate to 2.3% last month, the highest rate for more than three years.
Inflation was well above the 2.1% expected in a Reuters poll of economists, as grocery bills started rising after years of food getting cheaper.
The bigger-than-expected rise will intensify fears over people’s living standards being squeezed this year by higher living costs. While inflation has been going up, wage growth has been slowing, leaving households worse off.
The TUC said working people were facing the double blow of rising prices and slower wage growth. “If the government doesn’t wake up, we risk sleepwalking into another living standards crisis,” said the TUC general secretary, Frances O’Grady.
“We urgently need more investment in skills and infrastructure to build strong foundations for better-paid jobs. And it’s time to scrap the pay restrictions hitting hardworking teachers, nurses and other public servants.”
The jump from 1.8% inflation in January to 2.3% in February took inflation above the Bank of England’s 2% target and immediately raised expectations on financial markets that the Bank could raise interest rates sooner than previously thought to keep price rises in check.
The pound strengthened against the dollar to hit a three-week high of $1.2462 after the inflation figures were released.
Investors highlighted the significant pick-up in so-called core inflation, which excludes volatile prices such as food and fuel. That measure jumped to 2% in February from 1.6% in January and was well above forecasts of 1.8%.
The Office for National Statistics said the main upward effect on inflation came from motor fuels as prices rose by 1.2% between January and February, reflecting recent increases in global oil prices as well as the pound’s weakness since last June’s referendum. The weaker pound makes imports to the UK, including oil, more expensive.
The currency effect on inflation, combined with a rise in global oil prices, has brought a rude awakening for UK consumers, who had enjoyed near-zero inflation throughout 2015 and the first half of 2016. A number of companies, including food firms and the tech giant Apple, have announced price rises on the back of the weaker pound, which tumbled to three-decade lows after the Brexit vote.
Reflecting those moves, the ONS said another factor in February’s stronger inflation – the highest rate since September 2013 – was pricier laptops and tablets. They increased by 2.3% between January and February, having fallen by 5.1% a year ago.
Food prices rose in annual terms for the first time in more than two-and-a-half years with a wide range of items contributing to the pick-up. There were particularly large price rises for certain vegetables, consistent with reports of poor growing conditions in southern Europe, the ONS said. For example, the price of an iceberg lettuce increased by 67.2% between January and February.
The Treasury said the government understood the financial pressures on households.
“The government appreciates that families are concerned about the cost of living, and that is why we are cutting tax for millions of working people, increasing the national living wage to £7.50 per hour from next month, and freezing fuel duty for the seventh year in a row,” a spokeswoman said.
Economists expect inflation to rise further over coming months as the effects of the weak pound and higher oil prices continue to be felt. Some see inflation rising to 3% by the summer.
The Bank’s monetary policy committee (MPC), under the governor Mark Carney, has said it is happy to let inflation rise some way above its target as it balances the need to support growth and jobs with keeping price rises in check. But the minutes of its meeting last week suggested a split was emerging over how much inflation should be tolerated before taking borrowing costs higher again from their current record low of 0.25%.
Kallum Pickering, an economist at the bank Berenberg, said the MPC’s tolerance for rising inflation could be tested soon.
“As our base case, we look for a 25 basis point first rate hike in the second quarter of 2018, with a 30% chance the BoE raises the bank rate earlier. After today’s data release, risks to that call are skewed towards the BoE hiking sooner rather than later,” he said.
But James Smith, economist at the bank ING, said the squeeze on real incomes and the likely slowdown in consumer spending would deter the Bank from raising rates.
“Whilst this surge in inflation may raise a few eyebrows on the MPC, it’s what this means for consumers that really counts,” he said.
“We suspect that concerns about surging inflation will be gradually outweighed by the slower growth backdrop. We don’t expect any change in Bank rate before the end of 2018.”
The ONS also published figures on the public finances on Tuesday, showing chancellor Philip Hammond remained on track to cut the deficit this financial year.
Strong tax receipts helped cut public sector net borrowing to £1.8bn in February 2017, down by £2.8bn from February 2016. It was the lowest February borrowing since 2007. With one month left to go, borrowing for the financial year so far was £47.8bn. The fiscal watchdog, the Office for Budget Responsibility, forecasts a£51.7bn deficit for the whole financial year compared with the previous year’s £72bn.
Rising food and fuel prices hoist UK inflation rate to 2.3% – The Guardian