UK inflation rises to 1.8% spurred by weak pound and rising fuel costs

Production costs jump 20% in a year as pound’s sharp fall following Brexit vote ramps up imports bill just as oil prices start to bite

A surge in fuel prices helped push inflation to its highest level for more than two years last month and economists warned of more prices pressures as the Brexit blow to the pound ramped up firms’ costs.

The Office for National Statistics said inflation rose to 1.8% in January from 1.6% in December and was the highest since June 2014. But it was slightly less than expected, as falling clothes prices offset some of the upward pressure on inflation from fuel and food.

With inflation still below the Bank of England’s target of 2%, the latest figures bolstered expectations that policymakers would be in no hurry to raise interest rates. Reflecting that view, the pound dipped to below $1.25.

However, economists said inflation would rise further this year, going through the Bank’s target within months. Fuelling the rise is the pound’s sharp fall since the Brexit vote, which makes imports to the UK more expensive, and also the rise in oil prices on the back of lower production.

Data published alongside the inflation figures showed manufacturers’ fuel and material costs were rising at the fastest pace for more than eight years. Those costs, known as input prices, jumped 20.5% year-on-year in January.

Companies passed on some of their higher costs and output price inflation rose to 3.5%, the highest for five years.

“The costs of raw materials and goods leaving factories both rose significantly, mainly thanks to higher oil prices and the weakened pound,” said ONS head of inflation, Mike Prestwood.

The ONS said the rise in headline inflation, which measures the change in price for a wide basket of goods and services, was mainly down to pricier fuel, which went up 3.4% between December and January. There was also upward pressure from food prices, which continued to fall last month but at a significantly slower pace.

Inlfation graph

The figures add further to evidence that a long period of falling food prices since mid-2014 is now coming to an end. The pace of food deflation has eased off for four consecutive months.

The ONS said that excluding volatile items such as food and fuel, core inflation held at 1.6% in January, lower than forecasts for it to pick up to 1.8%.

Economists have warned rising inflation this year risks squeezing household incomes if wages fail to keep pace. Figures due on Wednesday are forecast to show underlying earnings growth held at 2.7% in the three months to December. But firms may be unwilling to keep raising pay as they grapple with higher costs and uncertainty about the future as Brexit negotiations unfold.

Responding to news of another rise in inflation, a spokesman for the Treasury noted that earnings were still rising faster than inflation and had done so for more than two years.

“The government appreciates that families are concerned about the cost of living and that is why we are cutting taxes for millions of working people and have frozen fuel duty, saving an average driver £130 a year compared to previous plans,” he added.

Theresa May has vowed to help what the government calls “just about managing” families but a new report on Wednesday highlights the scale of that challenge after a sharp rise in the number of people living on insufficient incomes over recent years.

The Joseph Rowntree Foundation estimates the number of people living below its minimum income standard (MIS) rose from 15 million to 19 million between 2009 and 2015, equivalent to a rise from 25% to 30% of the population. The MIS is a measure of what level of income is needed for a decent living standard, as defined by the public.

With prices in the shops going up, the foundation is warning that millions of just managing families are on “the tipping point of falling into poverty”.

“These stark figures show just how precarious life can be for many families. Government focus on people on modest incomes is welcome, but it cannot be at the expense of those at the poorest end of the income scale: it must remember just about managing today can become poverty tomorrow,” said the foundation’s chief executive Campbell Robb.

“This could be a very difficult time for just managing families as rising inflation begins to bite into finely-balanced budgets. The high cost of living has already helped push four million more people below an adequate income, and if the cost of essentials such as food, energy and housing rise further, we need to take action to ease the strain.”


Katie Allen

The GuardianTramp

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