- Title: Brexit hit pushes UK inflation to highest since mid-2014
- Date: 17th January 2017
- Summary: LONDON, ENGLAND, UNITED KINGDOM (JANUARY 17, 2017) (REUTERS) SOUNDBITE (English) JAMES BEVAN, CHIEF INVESTMENT OFFICER, CCLA, SAYING: "Mr. Carney makes two very interesting and important points about consumer spending. First, that there is going to be repression of real incomes as inflation rises. Secondly, as interest rates rise along the curve the cost of debt services becomes restrained on the capacity or the preparedness to spend and against that backcloth one should reasonably anticipate that the current binge on spending that we are observing in the economy will cool."
- Embargoed: 31st January 2017 12:04
- Keywords: Brexit UK inflation economy Carney BoE
- Location: LONDON, ENGLAND, UK
- City: LONDON, ENGLAND, UK
- Country: United Kingdom
- Topics: Economic Events
- Reuters ID: LVA0065ZGYVM5
- Aspect Ratio: 16:9
- Story Text:British inflation rose more strongly than expected in December to hit its highest level since mid-2014, propelled by the Brexit-fuelled fall in the value of sterling which looks set to hit consumers' spending power harder in the coming months.
Consumer prices rose 1.6 percent compared with a year earlier, the Office for National Statistics said, above economists' expectations in a Reuters poll for a 1.4 percent rise and up from 1.2 percent in November.
"We have had an immediate pass through of the weaker currency to headline inflation. We have had food price inflation, we've had energy price inflation. Whether it is an issue or not really depends on whether inflation now gathers pace and begins to be translated into higher wage inflation, reduced competitiveness and therefore reduced profitability," said James Bevan, Chief Investment Officer at CCLA.
Rising air fares and food prices, combined with a smaller fall in petrol prices than in December 2015, were behind December's increase in inflation, the ONS said.
The Bank of England is watching closely how quickly prices pick up as it tries to gauge the likely impact on spending by consumers, which has helped Britain's economy to withstand the shock of June's decision to leave the European Union.
The value of the pound, which has tumbled about 20 percent against the U.S. dollar and 13 percent against the euro since the June referendum - jumped after the inflation data was published, and British government bond prices fell.
The BoE has said it is neutral about which way interest rates might next move. It forecast in November that inflation will exceed 2.7 percent by the end of this year.
But since then the pound has weakened further and international oil prices have risen. Many private-sector economists predict that inflation will hit 3 percent, possibly as soon as this summer.
BoE Governor Mark Carney said on Monday (January 16) that Britain's recovery was increasingly reliant on consumers which made it vulnerable to the risk of a fall in spending power.
"One of the corroborating indicators in the potential deceleration of household spending is that the UK expansion is increasingly consumption led, and I don't mean consumption is the largest contributor of GDP we all know that, but the contribution of consumption to growth is greater than all other components contributing to GDP. And experience both here and across a range of advanced economies shows that consumption-led expansion tends to be slower, less durable as ultimately consumption outpaces earnings growth, increasing debt and making demand more sensitive to changes in employment and income. So at present we have a situation where households are almost entirely looking through Brexit-related uncertainties, savings rates are beginning to come down and consumer borrowing has accelerated notably. In the year to November total household borrowing rose by 4 percent and consumer credit rose by 10 per cent the fastest rate for the latter since 2005," said Carney.
He also said there are limits to how much of an overshoot the central bank will tolerate above its 2 percent inflation target.
Retail price inflation - tracked by British inflation-linked government bonds - rose by 2.5 percent in December compared with the same month in 2015, the sharpest increase since July 2014.
Excluding oil prices - which have risen sharply in recent months - and other volatile components such as food, core consumer price inflation was 1.6 percent, compared with economists' expectations for 1.5 percent.
Data on factory gate prices underscored the inflationary pressures in the pipeline. Output prices rose 2.7 percent, their fastest annual rise since March 2012 although a bit weaker than forecasts of a 2.9 percent increase in the Reuters poll.
Prices paid by factories for materials and energy rose by 15.8 percent, the biggest jump since September 2011.
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