Rising air fares and fall in value of pound sees inflation rise to highest level since mid-2014

This story is over

Inflation has risen to highest level since mid-2014, with consumer prices increasing by 1.6% in December 2016, up from 1.2% in November.

The Office for National Statistics (ONS) said rising air fares and food prices, combined with a smaller fall in petrol prices than in December 2015, were behind the increase.

A fall in the value of the pound since the Brexit vote is also thought to be a key factor behind the inflation rise.

The Bank of England (BoE) is watching closely how quickly prices pick up as it tries to gauge the likely impact on consumer spending, which has helped Britain’s economy to withstand the shock of June’s decision to leave the European Union.

The BoE forecast in November that inflation will exceed 2.7% by the end of this year as sterling’s big fall after the Brexit vote pushes up the price of imports.

But since then the pound has weakened further – falling below $1.20 on Monday, January 16 to hit one of its lowest levels in more than 30 years – and international oil prices have risen.

Many private-sector economists predict that inflation will hit 3%, possibly as soon as this summer.

The pound is down almost 20% against the U.S. dollar and 13% against the euro since the June referendum.

Bank of England Governor Mark Carney has said there are limits to how much of an overshoot the central bank will tolerate above its 2% inflation target although financial markets are suggesting investors see little chance of a rate hike before 2019.

On Monday, Carney said Britain’s recovery was increasingly reliant on consumers, which made it vulnerable to the risk of a fall in spending power.

Retail price inflation, tracked by British inflation-linked government bonds, rose by 2.5% in December compared with the same month in 2015, the sharpest increase since July 2014.

Excluding oil prices, which have risen sharply in recent months, and other volatile components such as food, core consumer price inflation rose by 1.6%, compared with economists’ expectations for 1.5%.

Data on factory gate prices underscored the inflationary pressures in the pipeline.

Output prices rose 2.7%, their fastest annual rise since March 2012 although a bit weaker than forecasts of a 2.9% increase in a Reuters poll.

Prices paid by factories for materials and energy rose by 15.8%, the biggest jump since September 2011.