Sterling rises as inflation smashes Bank of England's two per cent target as ONS changes headline measure

Jasper Jolly
(FILES) Britain's Bank of England is pic
The Bank of England targets inflation below two per cent increases in the consumer price index (CPI) (Source: Getty)

Inflation has smashed through the Bank of England’s two per cent target for the first time since November 2013 as the Office for National Statistics (ONS) changes its headline inflation measure.

Consumer price inflation (CPI), which has been the main measure of price rises since 2003, rose at an annual rate of 2.3 per cent in February, up from 1.8 per cent in January, according to the ONS. This was a faster increase than had been expected by economists.

The new measure, the catchily named consumer prices index including owner occupiers’ housing costs (CPIH), rose from two per cent in January to 2.3 per cent as well last month.

Read more: Britons' inflation expectations have hit their highest levels since 2013

Sterling rose to highs of $1.2474 against the US dollar to reach its highest point since the end of February as the new data was released.

The ONS is now in the strange position of reporting two different measures of how much prices are rising in the UK.

The odd state of affairs has arisen because of flaws in the methodology for CPIH, which have led the UK Statistics Authority to refuse to grant "national statistic" status to the measure.

The Bank of England will continue to use CPI as its target for monetary policy, as mandated by the Treasury. This is thought to be unlikely to change before CPIH gains the stamp of approval from the Statistics Authority.

Read more: General inflation is now outpacing rent rises

However, the confusion is unlikely to have major policy implications given the level of the measures, with both easily above two per cent.

Kallum Pickering, senior UK economist at Berenberg, said: "With inflation set to rise further over the course of this year, today’s data is rather ‘big’ upside news."

If inflation continues to rise faster than expected by economists the Bank of England could feel further pressure to raise interest rates sooner rather than later.

The Bank expects inflation to peak at around 2.75 per cent in early 2018, leaving relatively little leeway in its forecasts.

At its last meeting to decide monetary policy some members said it "would take relatively little further upside news" on inflation for a move towards tighter monetary policy.

Read more: Sterling jumps as Bank of England votes to leave monetary policy on hold

Rising transport costs caused by increases in the price of fuel were one of the main drivers of the headline increase in prices, the ONS said.

Meanwhile, food prices had a small upward effect on inflation for the first time since 2014.

Jonathan Athow, ONS deputy national statistician, said: “Inflation has risen to its highest rate for almost three and a half years with price increases seen across a range of items but with food and fuel having the largest impact."

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