Consumer price inflation rises fastest in a decade

Inflation rose faster than expected in December, landing at a 10-year high as the rising price of oil prices and increasing global demand for exports drove prices higher. A 3.1 percent increase in prices…

Consumer price inflation rises fastest in a decade

Inflation rose faster than expected in December, landing at a 10-year high as the rising price of oil prices and increasing global demand for exports drove prices higher.

A 3.1 percent increase in prices — the most since July 2008 — was largely driven by a rise in the price of oil, figures from the Office for National Statistics showed. The report confirmed that Britain’s economy expanded last year at its fastest pace since 2011 as businesses staged a late-year rebound from June’s Brexit vote.

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The pound surged after the figures were released, giving rise to speculation that the Bank of England will raise interest rates this year to prevent the economy from overheating. (The likelihood of a hike had been growing following the bank’s December assessment of the economy.)

The report came a day after the International Monetary Fund cut its outlook for Britain’s economic growth in 2018 and said inflation is expected to stay above the bank’s 2 percent target until 2020. The sharp rise in inflation has cast doubt on the bank’s ability to raise rates this year and could put pressure on the new government to take action to reduce the burden on consumers.

The BoE has already raised interest rates twice since 2015 as it tries to keep the economy growing at a reasonable pace and inflation below target. The central bank has said it may hike interest rates in February or May but it has indicated that it will do so only if it believes the economy is on the verge of overheating.

After three years of sluggish growth, Britain’s economy returned to growth in the third quarter after Britain voted to leave the European Union and continues to expand at a healthy pace. The GDP data released last week suggested that economic activity in the last three months of the year grew by 0.5 percent, the fastest in more than a year.

The PMI survey showed that while activity in the manufacturing and services sectors shrank in November and December respectively, the pace of contraction had slowed.

“We now expect headline inflation to remain close to the 4.2 percent YoY level in the next couple of months, before dipping back to 3.0 percent and 3.5 percent at the end of this year and beginning of next,” said Guy Stear, U.K. economist at Capital Economics.

He added that inflation would likely remain above the BoE’s target throughout 2018 and up towards 4.0 percent next year.

A separate report showed British producer prices dropped 2.1 percent in December, driven largely by a fall in oil prices. Producer prices fell 2.9 percent in the year to December and fell 1.9 percent in the year to November.

The report, which comes ahead of release of official British industrial production data, also showed that manufacturing, which accounts for just under 10 percent of the economy, increased 1.2 percent last month and 2.1 percent for the year.

The ONS revised figures for both industrial production and trade in goods that month, saying that gross domestic product declined by 0.1 percent rather than the 0.4 percent previously reported. However, the quarterly figure remained unchanged at 0.5 percent.

Consumers, who accounted for more than two-thirds of British economic activity last year, are being squeezed by higher prices as the weak pound drives up import costs. Meanwhile, consumer confidence is at its lowest point since August 2016.

Shaun Richards, chief economist at the Institute of Directors, said inflation is likely to keep rising over the coming months.

“While the consumer remains under pressure, firms will struggle to pass on the full costs of rising commodity prices to consumers,” he said.

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