Weak sterling spurs UK inflation rate rise
UK inflation rate rises to its highest level in nearly three years, with further increases predicted by experts. What are the root economic causes of this rise?
- IMF chief fearful of downside risks in global economy
- UK jobless total falls to lowest since 2006
- UK trade deficit narrows to defy downturn fears
The ONS reported that a rise in the cost of imported foods caused by sterling's fall could have been behind a significant slowdown in the fall of food prices. "Following a sustained period of deflation of food prices since mid-2014, during which the 12-month rate was often lower than negative three per cent, the rate has increased for four consecutive months, reaching negative 0.4 per cent in January," the ONS said. "This is the highest it's been since June 2014."Ian Stewart, chief economist at Deloitte, pointed out that the UK was not the only economy facing higher inflation. “Rising inflation is not just a UK phenomenon and is not just currency-related," he said."Prices are rising across the West, as higher fuel and other commodity prices feed through to consumers. In fact, German prices have risen faster than UK prices in the last year and, last month, Germany’s inflation rate was higher than the UK’s (at 1.9 per cent)."Ben Brettell, senior economist at Hargreaves Lansdown, said there were fears that inflation would overtake wage rises later this year, resulting in real incomes starting to fall again."Sterling has fallen around 12 per cent on a trade-weighted basis since last June’s referendum and, as a result, producers are facing sharply higher input costs – up 20.5 per cent on a year earlier."It’s almost unthinkable that cost increases of this magnitude can be fully absorbed, leaving firms with little choice but to pass at least some of the burden onto consumers. By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short term."Andrew Sentance, senior economic adviser at PwC, believes the inflation rate could hit three per cent by the end of 2017. “The trend is clearly towards higher inflation," he said, "and we should expect the rate of price increases to rise above the two per cent Bank of England target in the next few months."By the end of this year, inflation is likely to be around three per cent and possibly even higher. Rising energy prices and the weakness of the pound are the main factors behind this expected increase."
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