MercoPress. South Atlantic News Agency

UK January inflation climbs to 3%; Bank of England anticipates ‘bumpy road’ ahead

Bank of England policymakers are hopeful that we are in a “hump” and that inflation will fall back to target.

The UK rate of inflation reached 3% in January, from 2.5% in December, higher than forecasts and with the Bank of England anticipating a “bumpy road” ahead. Forecasts are that it will hit 3.7% later in the year and moving even further away from the Bank's 2% target.

BoE policymakers are hopeful that we are in a “hump” and that inflation will fall back to target. The latest increase was driven by a bigger-than-expected surge in airfares because of an erratic comparison with the same period last year, VAT rise on private school fees and energy costs.

However the Bank is concerned about the increases in food prices, which can be volatile. Core CPI inflation which strips out the volatility by excluding food as well as energy climbed from 3.2% to 3.7%.

Services inflation, which gives a better indication of underlying price pressures in the domestic economy, rose from 4.4% to 5%. That was lower than the Bank of England's 5.2% forecast.

It means the Bank is likely to continue its measured approach to monetary policy. Although inflation is above target, weak economic growth has been weighing heavily on the minds of the Monetary Policy Committee (MPC).

It's a balancing act. Two MPC members voted in January for a large 50 basis point interest rate cut this month. While the Bank is unlikely to cut again next month it is still expected to push through another two interest rate cuts this year.

Wages are growing at their fastest pace in three years and rising energy prices will drive inflation higher this year, but the Bank expects the headline rate to then start falling.

Weak economic growth should weigh on wages, taking the heat out of price pressures.
That is the Bank's reading of the situation, but the last few years have shown us that the “inflation tiger” can be an unpredictable beast and the geo-political risks continue to abound, particularly the US president tariffs policy.

BoE policymakers are hopeful that we are in a “hump” and that inflation will fall back to target. The latest increase was driven by a bigger-than-expected surge in airfares because of an erratic comparison with the same period last year, VAT rise on private school fees and energy costs.