UK Inflation spikes to 29 month high

UK CPI inflation reached its highest level in two-and-a-half years in December, after a surprise rise in core prices pushed the headline level to 1.6 per cent.  The December figure is a significant jump on NOvember’s 1.2 per cent and above expectations of a rise to 1.4 per cent.

The office for National Statistics said one of the biggest contributors to the above-trend inflation was transfport costs, which accounted for more than 0.3 percentage points of December’s figure.  Similarly, food and beverage costs fell by less than they did in December 2015.

However, it is the harp rise in core inflation – which strips out temporary price volitility by removing items such as food and energy – that concerned analysts.  Core inflation also rose to 1.6 per cent in December, from 1.4 per cent a month earlier, despite expectations for no change.

Input inflation, which measures the cost of supplies for manufacturers, hit 15.8 per cent, an indication of the impact of the weaker pound.

Capital Economics UK economist Scott Bowman urged calm, and suggested much of the core rise was down to air fares.

However, according to Pantheon Economics, the rise in core inflation was driven by a rebound in service sector proces, which rose by 2.5 per cent.  Chief UK economist Samuel Tombs said air fares accounted for just 0.03 percentage points.

Both economists said that the Bank of England would continue to look through the data.

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