Inflation rises closer to Bank of England's target rate as factory gate prices soar

 
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A grocer loads vegetables into his van a
Prices of imported goods have already risen sharply (Source: Getty)

Consumer prices growth accelerated at the fastest rate in 31 months in January, raising pressure on the Bank of England (BoE) to tighten monetary policy as inflation approaches its two per cent target, while a big jump in producer prices threatens to squeeze margins for manufacturers.

The consumer price index (CPI) of inflation rose by an annual rate of 1.8 per cent, according to the Office for National Statistics, with increases in motor fuel prices and food prices contributing to the increase.

Meanwhile, factory gate prices rose by an annual rate of 3.5 per cent, a big jump from the 2.7 per cent rate in the previous month to the highest since December 2011.

Read more: Spending on essentials soars as inflation starts to bite consumers

Material and fuel prices rose by 20.5 per cent for manufacturers, with a big contribution from oil price rises after the Organisation of the Petroleum Exporting Countries (Opec) cut production.

Mike Prestwood, the ONS head of inflation, said: “The latest rise in CPI was mainly due to rising petrol and diesel prices, along with a significant slowdown in the fall in food prices."

He added: “The costs of raw materials and goods leaving factories both rose significantly, mainly thanks to higher oil prices and the weakened pound."

The devaluation of sterling in the aftermath of the Brexit vote has seen the pound’s value against the dollar fall by around 16 per cent from its pre-referendum peak, pushing up prices for UK importers.

Suren Thiru, head of economics at the British Chambers of Commerce, said: “The continued rise in factory gate prices confirms that inflationary pressures in the supply chain are intensifying, and a sustained period of materially above target inflation looks increasingly probable."

The increase in producer prices has started to feed through into the consumer price index. A separate survey by pollsters GfK shows almost three-quarters of British consumers think prices have risen over the past year, while the same proportion thinks that prices will increase further in the year to come.

The rapid acceleration in prices puts increasing pressure on the BoE. The Bank is mandated to aim for a two per cent target for inflation. However, the Bank’s own forecasts show inflation reaching 2.7 per cent by the end of 2017, slightly lower than a consensus of independent economists polled by the Treasury.

The BoE has also significantly upgraded its prediction for growth in the UK economy, with GDP set to grow by two per cent. Strong consumer spending in the wake of the EU referendum took the BoE by surprise, causing successive upgrades to growth forecasts.

Read more: Brace for a hit to your pocket as inflation spikes this year

The combination of healthy growth and higher inflation last week prompted Kristin Forbes, an outgoing member of the interest rate-setting Monetary Policy Committee (MPC), to say she was “beginning to grow uncomfortable” with continued low interest rates and sustained quantitative easing.

Michael Martins, economist at the Institute of Directors, said: “A reduction in quantitative easing would help to offset inflationary pressures by reducing the money supply. This would allow private investors back into the short-term gilt market, helping to correct a fairly distortive policy intervention, and freeing up the ability to intervene in the future if necessary."

A rise in the main bank rate would be expected to reduce inflation, but could also weigh on growth prospects and raise unemployment as the supply of money to the economy tightens.

The rate of unemployment, which the MPC must balance with inflation, was recorded at 4.8 per cent in November, its lowest point since before the financial crisis.

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