UK inflation surges to 2 and a half year high - ING

According to James Knightley, Senior Economist at ING, rising import prices relating to sterling's plunge is set to push the UK inflation above 3% later this year.

Key Quotes

“UK consumer Price inflation has spiked to a 2 and a half year high of 1.6%YoY in December from 1.2% in November. This was above the 1.4% consensus. Sterling’s plunge is the key factor driving this move given the rise in import prices. So far it is most evident in the energy component, which is rising 4.3%YoY, but food is also starting to put in a big swing given 40% of the food in the UK is imported. Food prices are falling 0.1%YoY having been falling 1%YoY for the past few months. Clothing prices have also been picking up.”

“With retailers warning of higher shop prices in coming months we expect other categories to experience sharply higher prices. Note that pipeline price pressures are accelerating with producer input price inflation jumping to 15.8%YoY from 13.3% while output prices rose 2.7%YoY.”

“Households are prepared for this with the You/Gov Citi inflation expectations series jumping to 2.5% from 1.7% in the space of a month last year. It looks as though inflation will break above 3% in the second half of this year, but we doubt that the Bank of England will respond with higher interest rates. Inflation has risen above 5% on two occasions since the Global Financial Crisis and the BoE has “looked through” this on both occasions.”

“The 2008 and 2011 inflation spikes were primarily caused by currency depreciation, commodity price rises and VAT hikes. However we don’t expect surging commodity prices or any other VAT hikes this time round, so the inflation peak should be lower. Instead, the risks to growth relating to Brexit uncertainty is likely to heavily influence the BoE’s thinking, while a squeeze on spending power from higher inflation may also weaken consumer spending. Rates are unlikely to be changed this year.”