The UK’s annual inflation rate rose slightly slower than economists had expected in January, but still hit a fresh two and a half year high as the impact of a weaker pound and rising energy prices are increasingly passed on to consumers.

The latest official reading from the Office for National Statistics showed prices rose 1.8 per cent on an annual basis, below the 1.9 per cent predicted by economists. The level is within sight of the Bank of England’s 2 per cent inflation target, but is expected to accelerate past this target in the coming months.

Although consumer prices pulled back slightly on a monthly basis, falling 0.5 per cent, there were renewed signs of faster rises to come as producer price inflation jumped to 3.5 per cent, its highest level in five years.

The producer price index tracks prices paid and charged for materials and fuels by manufacturers, and can be seen as an early gauge of inflationary pressures which may be passed onto consumers later.

The UK economy has so far held up much better than expected since June’s vote to leave the EU, but economists have warned that higher inflation could weigh on growth this year. The Institute for Fiscal Studies highlighted last week that consumer spending was the only component of gross domestic product to deliver a “robust performance” in 2016, and spending growth is expected to almost halve this year as higher prices discourage consumers.

The Confederation for British Industry reported recently that retail sales growth already fell back sharply in January, with almost a third of surveyed retailers reporting a decline in sales.

Mike Prestwood, ONS head of inflation, said:

The latest rise in CPI was mainly due to rising petrol and diesel prices, along with a significant slowdown in the fall in food prices. The costs of raw materials and goods leaving factories both rose significantly, mainly thanks to higher oil prices and the weakened pound.

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