Tuesday 17 January 2017 9:34 am

UK inflation rises faster than expected to hit highest rate in more than two years

Chief City reporter covering banking, finance, economics and the City

Chief City reporter covering banking, finance, economics and the City

Follow Jasper Jolly

Prices in the UK increased faster than expected in December, as the impact of a weaker pound continues to feed through on consumer shopping baskets.

The consumer price index rose by an annual rate of 1.6 per cent, beating market expectations of around a 1.4 per cent increase in prices, according to the Office for National Statistics.

Rising transport costs were the main contributor to the measure, which measures prices across a broad basket of goods and services. Fuel for transport, which is mainly imported, has come under twin pressure from a weaker pound and higher oil prices after a production cut in November.

Read more: Latest ONS data expected to show inflation at 1.5 per cent

In November annual consumer price inflation of 1.2 per cent was the highest rate in two years. Prices stayed relatively constant over the course of 2015, but during 2016 inflationary pressure started to increase.

The fall in the pound after the Brexit vote has increased this inflationary pressure dramatically. The pound is around 18 per cent less valuable than it was at its 2016 peak before the vote.

Factory gate prices have increased at an annual rate of 2.7 per cent. Producer prices are more immediately exposed to currency movements when buying raw materials imported from foreign countries. Input prices have reflected this, with a 15.8 per cent rise, a five-year high.

Consumer prices increases generally lag behind producer prices as the increased costs take some time to feed through the economy.

Mike Prestwood, ONS head of inflation, said: "This is the highest CPI has been for over two years, though the annual rate remains below the Bank of England’s target and low by historical standards."

He added: "Rising airfares and food prices, along with petrol prices falling less than last December, all helped to push up the rate of inflation. Rising raw material costs also continued to push up the prices of goods leaving factories."

In a speech yesterday BoE governor Mark Carney said there were limits to the Bank’s tolerance of higher inflation. At its last rate-setting meeting the Monetary Policy Committee (MPC) held rates steady at record lows of 0.25 per cent.

Carney said the Bank had "tolerated periods of above-target inflation in order to support the real economy, while at all times respecting the primacy of the inflation target.”

Read more: Inflation set to hit UK consumers in the pocket – and dent UK growth

The Bank has a legal mandate to balance inflation targeted at two per cent with healthy unemployment levels.

Carney said: “In exceptional circumstances, trade-offs between real stability and inflation can arise that monetary policy is required to balance.”

The inflation figures come before a long-awaited set-piece speech by Prime Minister Theresa May, who will set out her plan for the UK’s negotiations on leaving the EU.