London - UK inflation picked up less than economists
forecast in January as clothing-store discounts kept the rate from reaching the
Bank of England’s target.
The increase in the rate to 1.8 percent from 1.6 percent
in December fell short of the 1.9 percent estimated in a Bloomberg survey. The
pound weakened and traders pared bets on a Bank of England interest-rate
hike by the end of 2017.
While less than anticipated, inflation is still running
at the fastest pace in more than two years. Rising fuel costs coupled with a
weaker pound are set to push it above the BOE’s 2 percent goal soon, with some
economists forecasting it will hit 3 percent by the end of the year. In a sign
of the upward pressure, annual growth in factory input costs surged to the
fastest since 2008.
In January, clothing prices fell 4.2 percent on the
month, pulling annual inflation in that category back to zero, the Office for
National Statistics said. The biggest upward effect on headline inflation came
from motor fuels. Food prices fell the least in more than two years.
“The downside surprise entirely reflected a pull back in
clothing inflation,” said Samuel Tombs, an economist at Pantheon in London. “We
continue to expect inflation to rise sharply over the coming months.”
Read also: Signs inflation is on the move
Sterling was down 0.4 percent at $1.2481 as of 10:05 a.m.
London time. The odds on a BOE rate hike by the end of the year slipped to 24
percent from 29 percent on Monday.
BOE forecasts
The BOE sees inflation accelerating through this year and
peaking at 2.8 percent in early 2018 after the UK’s vote to leave the European
Union slashed the value of the pound. The central bank kept interest rates
unchanged this month as policy makers said they could look through a period of
faster price gains as long as they don’t get out of hand.
Import costs rose more than 20 percent year-on-year, the
most since 2008. Crude oil has surged 88 percent, the biggest jump since the
turn of the century.
Higher inflation rates will mean a reduction in
households’ spending power if wage growth -- currently running at 2.7 percent
-- doesn’t also pick up. Wireless-speaker maker Sonos said on Monday it will
raise the cost of its products in the UK by as much as 25 percent, becoming the
latest in a string of companies to blame the weaker pound for a price hike.
Based on CPIH, which includes some housing costs,
inflation was 2 percent in January. It will become the headline measure next
month, though the BOE will continue to target the CPI figure.
While the BOE has a “neutral” stance on interest rates,
some policy makers have begun to raise concern about the pickup in price growth
after the economy performed better than expected in the second half of 2016.