UNITED KINGDOM – British inflation unexpectedly approached its highest level in almost six years in January, highlighting the problem that the Bank of England will face in trying to bring prices back to the target level in the next two years.
Inflation in consumer prices in January remained at 3%, unchanged from the previous month, after reaching a maximum level in March from 3.1% in March, the National Statistical Office (ONS) reported.
This figure surpassed the expectations of economists surveyed by Reuters, who forecasted a drop in inflation to 2.9%.
The Bank of England surprised the financial markets last week, indicating that it wants to return inflation to the target faster than before, seeking to return price growth to the level of 2% for two, not three years.
Bank of England Governor Mark Carney and his colleagues at the Monetary Policy Committee said interest rates would need to increase earlier and slightly more than had been expected before.
Markets now have a 70% chance to assess the possibility of an increase in interest rates by 0.25% by May and about 50% the probability of a further rate hike to 1% by the end of the year. The last time such an interest rate was observed in 2009.
It is expected that the combination of high inflation and limited wage growth, as well as uncertainty about the conditions on which the UK will leave the European Union in 2019, mean that this year the economy of Britain will be weaker than in other EU countries.
Nevertheless, it is expected that consumer price inflation will begin to weaken, as the peak effect of the sharp drop in the pound sterling in mid-2016 after the Brexit vote falls out of annual comparisons.
Last week, Governor of the Bank of England Mark Carney said that inflation could rise above 3% before it starts to slowly decline.
For producers, the cost of raw materials, which is mainly imported, increased by 4.7% compared to January 2016. Economists surveyed by Reuters expected that commodity prices will grow by 4.2%.
In the ONS reported that house prices in December rose by 5.2% per year throughout the United Kingdom as a whole compared to 5% in November. Prices only in London increased by 2.5%.
Mortgage lender Halifax reported last week that average house prices in the UK rose by 2.7% compared to the previous year in the fourth quarter of 2017, but they also declined in December and January.