Food and fuel prices set to push up inflation

Inflation is forecast to come in just over the Bank of England's 2% target when official figures are released on Tuesday
Inflation is forecast to come in just over the Bank of England's 2% target when official figures are released on Tuesday

Rising food and fuel prices are expected to push inflation beyond the Bank of England’s 2% target when official figures are released on Tuesday.

The Consumer Price Index (CPI) measure of inflation is expected to reach 2.1% in February, as sterling’s post-Brexit collapse makes everyday items more expensive.

The move would be the first above-target rise since November 2013 and will put pressure on the Bank’s Monetary Policy Committee (MPC) to hike interest rates beyond 0.25% this year.

CPI has risen consecutively over the past three months, hitting 1.8% in January and 1.6% and 1.2% in December and November respectively.

Jack Coy, economist at the Centre for Economics and Business Research (Cebr), said a jump in the cost of living to 2.1% means real wages will start to shrink in the months ahead.

“With upward pressure from the weak pound and higher global oil prices than a year ago, inflation is showing no signs of plateauing.

“Such a rise would bring inflation just below nominal wage growth. Real wages are now growing negligibly and may begin to shrink in the coming months.”

Food is becoming more expensive as producers begin to pass down soaring import costs triggered by the pound’s slump since the EU referendum result.

Overall food prices were flat between December and January after falling 0.6% a year ago, as the sharp drop in grocery costs – driven by the supermarket price war – ground to a halt.

However, average prices at food stores have seen their largest increase since April 2013, rising 0.5% in January, the Office for National Statistics said.

It helped trigger an unexpected fall in retail sales by 0.3% for the first month of the year, suggesting household spending was being squeezed by higher inflation.

February’s inflation data comes as the ONS switches its central measure of inflation from CPI to CPIH.

While CPIH will not measure house prices or mortgage payments, it will estimate how much a homeowner would pay to rent their home and will also include council tax.

The Bank of England – which will continue to use CPI as its measure for setting interest rates – is forecasting inflation to lift to 2% in February, peaking at 2.8% in the first half of next year, before falling back to 2.4% in three years’ time.

Kristen Forbes, one of the nine rate-setters on the MPC, broke rank to vote for an interest rate hike to 0.5% last week amid fears that inflation is ”rising quickly and was likely to remain above target for at least three years”.

Robust consumer spending helped power economic growth in the final months of last year, with gross domestic product (GDP) expanding by 0.6% in the fourth quarter, in line with the second and third quarters.

However, economic think tank EY Item Club expects consumer spending growth to slump to a four-year low for 2017, as households feel the pinch from inflation, welfare cuts and weaker earnings.

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