Inflation hits 1.6 per cent: Experts react to biggest price rise in two years

 
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Inflation is set to rise further this year (Source: Getty)

Inflation has come in higher than expected as weaker sterling continues to feed through into higher prices for the UK consumer. The 1.6 per cent increase in December surprised analysts.

The Bank of England expects inflation to hit 2.7 per cent by the end of this year. It has a legal target rate of two per cent.

Here's a roundup of reactions.

John Hawksworth, chief economist at PwC, said it reflects “the feedthrough from a weaker pound following the Brexit vote and a turnaround in global commodity prices during the course of 2016".

We expect this rise in inflation to continue, based on cost pressures building up in the supply chain and the recent renewed weakness of sterling, taking it above its two per cent target by mid-2017 and close to three per cent by the end of the year.

“With wage inflation expected to remain sticky, we expect this to squeeze consumer spending power over the course of this year, dragging down economic growth to below two per cent in 2017,” he added.

Tom Stevenson, investment director at Fidelity International, said: “Inflation is back with a vengeance.”

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.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said:

The upside surprise was driven by core inflation, which rose to 1.6%, from 1.4% in November, above expectations for no change.

"The contribution of both food and motor fuel prices will rise further as recent increases in wholesale prices are passed on to consumers. Core goods inflation will rise in earnest soon, as retailers’ exchange rate hedges expire, forcing them to increase prices. Services inflation likely will grind higher too as firms endure big increases in minimum wages and non-wage labour costs."

James Sproule, chief economist at the Institute of Directors, said: “Above target inflation raises the question of interest rate rises.

Having only recently cut interest rates, the Bank is now left in the uncomfortable position of having to reverse course. So be it, they can’t wait forever and as 2017 goes on, pressure will mount on the governor to start raising rates.

"Monetary policy should be set for the long-term, and that means policy makers need to look through the haze of Brexit speculation as well as consider the effect of rates in asset prices," he added.

Viktor Nossek, director of research at WisdomTree, said:

There can be no denying the UK now finds itself in a tight spot. While some inflation is healthy, it depends on the type, and unfortunately the UK is facing ‘bad inflation’ caused by a tumbling pound and rising costs on the supply side, rather than surging demand.

Ben Brettell, senior economist at Hargreaves Lansdown, said:

December’s producer price data contains a strong indicator that higher inflation is coming. Input costs rose 15.8 per cent year-on-year – the highest figure recorded for more than five years.

“However, the effect of the weak pound, assuming it doesn’t fall much further, is a one-off factor which will fall out of the figures eventually. The longer-term picture is one of structurally low inflation – due in part to demographic reasons.”

Howard Archer, chief UK and Europe economist for IHS Markit, said:

It is increasingly evident that sterling’s weakness is increasingly feeding through to cause retailers, services companies and manufacturers to lift their prices (or reduce the sizes of products, notably in the case of food items).

“We expect inflation to move above the Bank of England’s two per cent target rate by March, then to rise to three per cent in late-2017 and peaking around 3.3 per cent early on in 2018.”

Shilen Shah, bond strategist at Investec, said: “The year on year CPI print for December came in 0.2 per cent higher than the consensus figure of 1.4 per cent as the sharp fall in Sterling’s value pushed up import prices. Import prices themselves jumped by 16.9 per cent year on year and this is a sharp indicator that consumers are likely to be faced with further price pressures in 2017."

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