Inflation rise marks start of upward trend in UK

Inflation in the UK could be set to pass the Bank of England’s 2 per cent target later this year, economists predicted, after data for January showed a slight increase driven by price rises for furniture, transport, hotels and food.

The price of consumer goods rose at an annual rate of 0.7 per cent in the 12 months to January this year, up from 0.6 per cent in December, the Office for National Statistics said on Wednesday.

With Boris Johnson, UK prime minister, set to announce plans for easing lockdown restrictions next week, economists said inflation was likely to continue to rise as surging oil prices are passed on to consumers and VAT cuts introduced in the pandemic are reversed.

“January’s small rise in CPI inflation marks the first step this year towards an above-target rate by the autumn,” said Samuel Tombs, chief UK economist at Pantheon Economics.

Despite January’s lockdown, prices last month rose in almost all categories as many retailers, restaurants and hotels held back from offering their normal new year discounts. The only consumer category not to push inflation up was clothing and footwear.

After falling gradually for two years and dropping faster as the pandemic took hold, inflation in the UK reached a four-year low of 0.2 per cent last August as a result in part of government measures such as the Eat Out to Help Out scheme, which offered consumers 50 per cent off restaurant meals.

The National Institute of Economic and Social Research, an independent research institute, said ONS figures and its own measures suggested inflation had reached a “turning point”.

Its measure of underlying inflation, which excludes extreme price movements, rose to 0.5 per cent in the year to January from 0.3 per cent in November, the first increase since October last year.

Janine Boshoff, macroeconomic economist at NIESR, said this suggested inflation had “bottomed out” in December 2020. Inflation was likely to rise throughout the year, she said, although it would likely remain “subdued” in the short term.

“We expect inflation to rise in the latter half of the year as the economic recovery gains pace on the back of a successful vaccination programme and higher producer costs are passed on to consumers,” she said.

Despite inflation rising this month, most of the upward pressures on prices are yet to come into effect.

In March the temporary VAT cut for hospitality and leisure will come to an end, and energy prices will rise for consumers in April when Ofgem’s decision to raise the cap on widely used tariffs comes into effect. Base effects from low oil prices last year will also be magnified by more recent rises.

Paul Dales, chief UK economist at Capital Economics, said January’s increase would be “trivial” compared with an increase to 2 per cent in April and 2.5 per cent by year’s end, which he said appeared to be “baked in the cake”.

However, other economists noted that upward pressure would be tempered by rising unemployment and slack in the economy, preventing inflation rising far beyond the 2 per cent target.

“Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the immediate term,” said Howard Archer, chief economist at EY Item Club.