The latest on the UK inflation
Commenting on the latest UK inflation data, Chris Williamson, expert from Markit, said:
“UK inflation surged above the Bank of England’s 2.0% target for the first time in over three years in February, underscoring how consumer spending is likely to be increasingly squeezed by higher prices in 2017.
“The Bank of England still looks likely to look through the upturn in inflation, but much will depend on the extent to which consumer spending and wage growth will be dampened this year.
“Official data showed inflation rising to its highest since September 2013. Consumer prices rose 2.3% on a year ago in February, according to the Office for National Statistics, the rate of inflation picking up from 1.8% in January and just 0.3% this time last year.
“Further upward pressure on consumer prices looks almost certain as firms pass rising costs onto customers in coming months. Recent PMI survey data show companies’ input costs increasing at a rate not exceeded since before the global financial crisis, due mainly to import costs surging higher as a result of the weakened pound. The same survey data indicate that average prices charged for goods and services are meanwhile rising at the fastest rate for almost six years.
“Given the recent upturn in firms’ costs, we would expect to see inflation edge above 3% by the end of the year.
“The steeper than expected upturn in inflation will also lead to speculation that the Bank of England will turn more hawkish. One member of the Bank’s Monetary Policy Committee has already voted to raise interest rates.
“However, it remains likely that policymakers will adopt an increasingly dovish tone in coming months, despite the rise in inflation, as the economy slows due to consumers being squeezed by low pay and rising prices.
“With employee pay growth having slowed to 2.2%, real pay is now declining, and is likely to fall at an increased rate in coming months as inflation lifts higher. Recent survey data have already shown household finances being squeezed to one of the greatest extents for over two years in February amid low pay and rising prices.
“It’s wage growth and consumer spending rather than headline inflation that will therefore be important indicators of Bank of England policy. For interest rates to remain on hold, we need to see consumer spending growth wane in coming months and wage growth to remain subdued. On the other hand, any surprise resilience of consumer and feed-through of rising inflation into wage pressures will likely result in increased speculation that the next move by the MPC will be a rate hike.”