Inflation rises above BoE 2% target – economists respond

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The latest data on the UK’s inflation rate are in, and they showed consumer prices rose at their fastest rate in three and a half years in February.

After last week’s more hawkish than expected comments from the Bank of England, today’s figures will raise further questions over whether the Bank will raise rates to try to temper rising prices. The pound jumped after the news was released as traders saw an increased likelihood of a hike, but here’s what experts are saying:

Samuel Tombs at Pantheon stressed the impact of the weaker pound on imports:

The jump in CPI inflation in February to its highest rate since September 2013 shows that the import price shock is hitting the economy much sooner than the MPC expected. The rise in the headline rate primarily reflected a 0.25pp boost from a jump in core goods inflation – which includes, for instance, clothing, tech goods and recreational items …these goods are commonly imported.

All told, we continue to think that CPI inflation will average about 3 per cent this year and peak at about 3.5 per cent towards the end of 2017. Inflation therefore looks set to exceed the MPC’s forecast for an average rate of just 2.4 per cent this year. But with the pickup chiefly reflecting sterling’s depreciation rather than domestically-generated inflation and no signs yet that wage growth is tracking inflation higher, a majority of members likely will still vote to keep interest rates on hold this year.

James Athey, investment manager at Aberdeen Asset Management, said the latest figures will increase pressure on the Bank of England to raise interest rates:

Today’s inflation print is just going to compound the Bank of England’s headache. Their forecasts predict a slowdown in the coming months so the last thing that they want to deal with is inflation being above target. It’s unlikely that they’ll do anything imminently but they really need to start considering getting rates back to where they were before the referendum. It was a pre-emptive cut that, whether warranted or not, has turbo-charged the depreciation in sterling and given the Bank this inflation headache. Don’t expect much anytime soon though. Raising rates would be a proactive and forward thinking move. Two things that the Bank of England isn’t particularly well-known for.

However, ING’s James Smith thinks a squeeze on household incomes will discourage any rate move:

Whilst this surge in inflation may raise a few eyebrows on the MPC, it’s what this means for consumers that really counts. At 2.3 per cent year-on-year, wages (ex. bonuses) are now growing at the same rate as inflation. With rising food and fuel prices set to push inflation above 3 per cent by the end of the year, 2017 looks set to be an increasingly tough year for households.

So despite the surprisingly hawkish shift in the Bank of England’s stance last week, we suspect that concerns about surging inflation will be gradually outweighed by the slower growth backdrop.

Meanwhile, Sam Hill at RBC points out that the ‘surprise’ was, well, expected.

We know that, like us and the consensus, the MPC expect further increases in coming months. So for policymakers to be materially influenced by the inflation data, a second consecutive clear overshoot of Bank staff forecasts next time is likely to be required at a minimum.

And Simon Derrick at BNY Mellon notes:

Today’s UK inflation data was already front and centre in the market’s vision even before they were published thanks to a very clear warning last week from the Bank of England about the possibility of a significant overshoot going into the summer months. In the event it appears that this overshoot is already building.

Possibly the most interesting part of this, however, was sterling’s relatively muted reaction to the publication of the number given the shift in yield spreads in favour of the UK. This might be an indication that the news from yesterday that Article 50 is set to be triggered on March 29 continues to weigh on sentiment.

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