UK inflation in January was higher that the market expected and keeps the prospect of a Bank of England interest rate hike in play over the coming months.
The consumer price index in January was 3.0% higher than a year ago, the Office for National Statistics revealed on Tuesday, the level that it fell to in December from 3.1% the month before. This headline rate was in line with the Bank of England's inflation report last week but stronger than the average forecast from economists of 2.9%.
Core CPI, which strips out more volatile prices such as food and fuel, rose 2.7% in January, more strongly than the 2.6% predicted and up to its joint highest level since 2011 from the 2.5% rise a month before.
On a month-over-month basis, CPI fell 0.5% in January, less than the 0.6% fall predicted after rising 0.4% a month earlier.
CPIH, which is the preferred measure of inflation of the ONS as it includes owner-occupiers' housing costs, rose 2.7% for the second month in a row, which was shy of the 2.8% expected.
A large downward contribution from fuel prices, rising by less this year than they did in January 2017, held back the headline CPI rate from returning to 3.1%, though this was offset by a rise in the contribution from prices for recreation and culture - admissions to zoos and gardens in particular according to the ONS.
Producer input and output price inflation both ticked down in January.
Last week the BoE's quarterly inflation report forecast CPI would ease to 2.16% in two years' time, down from its earlier estimate of 2.21%, despite sterling's recent appreciation. The MPC acknowledged for the first time the risk that "the contribution of imported inflation pressures would diminish more rapidly than in the central projection".
With core CPI now back to the joint highest level since 2011, the pressures remains on the central bank to raise rates, with markets factoring in a greater than 50% chance of two or more rate rises in 2018.
As the rise in core inflation was concentrated in the recreational and cultural services sector, where labour costs account for a high percentage of firms' costs, the data lend weight to the MPC's concern that domestically-generated inflation is beginning to pick-up in response to the tight labour market, said economist Sam Tombs at Pantheon Macroeconomics.
Chris Williamson at IHS Markit said higher than expected in January added "further pressure for policymakers to hike interest rates again, possibly as soon as May".
"However," he added, "with mounting signs of economic growth slowing at the start of 2018, a May rate rise is by no means a done deal and will likely be dependent on the data flow improving in coming months."
Nikesh Sawjani, an economist at Lloyds Bank Commercial Banking, said the ONS figures backed up the view that the downtrend in inflation is likely to be very gradual. "Over the coming months, as the fading impact of previous sterling weakness unwinds, domestic inflation pressures are expected to build, ensuring that the return in CPI towards its 2% target is expected to be very slow," he said.
Paul Hollingsworth at Capital Economics said CPI inflation will gradually drift downwards over the course of 2018 as the impact of the post-referendum drop in the pound continues to fade. "
Note that producer input and output price inflation both ticked down in January. As a result, we think that CPI inflation will end this year at around 2.25%.
"Somewhat counterintuitively, this may make it easier for the MPC to hike interest rates, as it helps to ease the squeeze on consumers' real incomes, the largest constraint on spending growth at present, which should help the economy to pick up a bit of pace. Indeed, we think that stronger growth will allow the MPC to hike interest rates by three times this year, more than markets expect."