Surprise Jump in UK Inflation

The rate of inflation in the UK went up unexpectedly in the month of December, the rate of inflation is now above 0.1% for the first time since January 2015. The Office for National Statistics said that the inflation rate for the last month of 2015 was up to 2%.

The Office for National Statistics went on to say that they believe that increases in transport costs such as air fares, and also prices for petrol and diesel, were largely responsible for contributing to the rise.

The increases in these areas were slightly dampened by the fall in prices of items such as alcohol, tobacco and also food items and beverages which are non-alcoholic.

The first eleven months of 2015 were all characterised by inflation rates of somewhere between 0.1% and -0.1%; it is believed that this stagnation was partly down to a fall in global commodity prices.

There is, however, one form of inflation that continues to outpace the other catergories; house price inflation remains incredibly far in front of the rest. The rate of house price inflation is not included in the CPI (Consumer Price Index). The Office for National Statistics currently estimates that house prices went up by 7.7% in the twelve months leading up to November, this represents an increase of 0.7% on the previous month; house prices went up by 7.0% in the twelve months to October. The east of England saw the biggest increases in house prices.

When you turn to the RPI (Retail Price Index) for inflation, which includes somes housing costs and is also still used as a benchmark against which to set the prices of things like train tickets and payments for pensions, inflation stood at a rate of just 1.2% for the twelve months to December- this was an increase of 0.1% on the previous month.

The Bank of England, last week, once again decided to keep the base rate of interest at the same level that it has been for years. Interest rates are currently at a record low of 0.5%. There had been widespread confidence that these interest rates would be lifted at some point in 2016. However, with the current financial climate as it is, many are now beginning to think that this is looking increasingly unlikely to happen. There is also a growing consensus among market analysts that the rate of inflation will not hit the Bank of England’s target level of 2% at all in the year 2016.

James Tucker, the head of CPI at the ONS, said:

“Today’s small rise in CPI was mainly down to air fares and motor fuels, partially offset by falls in alcohol and food prices.”

“While this modest rise takes CPI to its highest level for 11 months, it is still at historically low levels.”

The pound fell sharply over the last few weeks against the dollar and the euro because of the reassessment of the likelihood of an interest rates rise. However, it went some way to making a recovery this week as it jumped 0.6% to the euro (1.315) and 0.5% against the dollar (1.432).

The rate of producer price inflation continued to fall in the month of December. The producer price inflation is used as a measurement of the price of goods that are traded by manufacturers in the UK. The ONS estimated that factory gate inflation had gone down by 1.2%- this was slightly less than in November when it dropped by 1.5%.

Manufacturers have been boosted a lot by the global fall in commodity prices, the total cost of input has fallen by 10.8% in the year to December.

Investment Director from Fidelity International, Maike Currie, commented saying:

“Today ‘s figures show UK prices increased incrementally to 0.2% in December, and while this is the first month since January 2015 that the rate exceeded 0.1%, the trend of near-zero inflation is expected to continue as a slowdown in the emerging world and the global manufacturing sector puts a dampener on demand.

“Persistently weak inflation means there is little incentive for the Bank of England to raise interest rates. Those wanting an early rise may point out that the big falls in food and petrol prices in early 2015 will soon drop out of the inflation numbers in coming months.

“However, as these temporary pressures wane, the key drivers determining the future path of inflation will increasingly be domestic costs, specifically labour costs. In this light, markets will no doubt keep a close eye on tomorrow ‘s employment numbers. Bank of England governor Mark Carney has said he wants to see annual wage growth of about 3%, among other factors, before the time is right for the Bank of England to move on rates.”

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