Danny McCance 12 Dec 2017 04:18pm

Inflation rise triggers Bank of England explanation

The inflation rate rose to 3.1% today, breaching the Bank of England’s (BoE) target of 2% by more than one percentage point

The consumer price index rose up 0.1 % from October, and is the highest since March 2012, according to the Office for National Statistics (ONS).

The latest move means that BoE governor Mark Carney will be required to write a letter to Philip Hammond explaining why the figure has exceeded the target by so much.

However, Rhys Herbert, senior economist at Lloyds Bank Commercial Banking thinks the letter will not be difficult to write because it was only last month that the BoE raised its policy rate and the “rise looks narrowly based”.

“We believe today’s data is likely to represent a near term peak for CPI inflation as the impact of Sterling’s depreciation on prices appears to be waning,” Herbert added.

“Indeed, we expect consumer price inflation to fall back to close to 2.0% by the end of 2018, and it could dip below 2.0% during 2019,” said Howard Archer, chief economic advisor for EY.

“Sterling’s sharp drop in the second half of 2016 should have now largely fed through the pricing chain and the impact of this is seen as increasingly fading,” he added.

This optimism was echoed by Andrew Sentance, senior economic advisor at PwC, who said the firm was “probably close to the peak for inflation now, but it will only fall back gradually next year.” 

However this is still not good news for wage growth, which is predicted to remain low over the next five years amid a poor decade for productivity growth.

“That means price rises will continue to run ahead of pay growth in the first half of 2018 - continuing the squeeze on real incomes and consumer spending,” said Sentance.

“That is likely to continue to act as a dampener on economic growth in the next few quarters,” he added.

Archer said that the latest rise has been attributed to the drop in sterling since the Brexit vote and a strong global economy for pressure on food and energy prices, alongside pressure from air fairs and computer games.