The impact from the fall in the pound has started to feed through to import price inflation, but we expect the Bank of England (BoE) to hold fire on raising interest rates.
UK consumer price inflation has jumped to its highest rate since September 2013, as the fall in the pound since the Brexit referendum has started to push prices of imported goods up.
The headline rate of annual consumer price inflation (CPI) rose from 1.8% in January to 2.3% in February, surprising to the upside when consensus expectations were for a rise to 2.2%.
Inflation has been rising steadily for some time, mainly due to the negative impact of the recent fall in global energy prices dropping out of the annual comparison. However, the impact from the fall in sterling is now also feeding into consumer prices, which is set to squeeze household finances over the course of this year. We forecast headline inflation to rise through 3% in the coming months, before peaking around the end of the summer, and then steadily coming down to around 2% over 2018.
For the BoE, the latest figures will be disappointing. Inflation is likely to overshoot the Bank’s forecast and could persuade ratesetters to consider raising interest rates later this year. Indeed, outgoing Monetary Policy Committee member Kristin Forbes voted to raise interest rates at the last meeting, and could have more support over the coming months.
We expect the Bank to hold fire for now as the rise in inflation is not being matched by higher wage inflation. As a result, the real disposable income of households is falling, which should reduce demand in the economy and therefore inflation in time. We doubt the BoE would want to raise interest rates at a time when household finances are being squeezed.
Azad Zangana - Senior European Economist & Strategist - Schroders