UK inflation rises in January as consumers pay more for food

British inflation edged up in January as locked-down consumers paid more for food and sellers of furniture and other household goods offered smaller-than-usual New Year discounts to people seeking to spruce up their homes.

The annual 0.7% increase in consumer prices is expected to gather speed in the coming months - pushed up by the end of an emergency tax break and possibly the impact of Brexit - and might go above the Bank of England’s (BoE) 2.0% target this year.

Economists said there was little pressure on the central bank to think about scaling back its stimulus plans.

However, yields on 10- and 30-year British government bonds extended their recent climb and hit their highest since March 2020 as investors prepare for higher inflation and more fiscal stimulus in the United States.

“Inflation rose slightly in January, with food prices increasing. Household goods also pushed up prices with less discounting this year on items such as bedding and settees,” ONS statistician Jonathan Athow said.

Analysts polled by Reuters had mostly thought the consumer price index would hold at December’s 0.6% increase.

Food and drink prices rose by 0.6% between December and January - compared with a 0.2% fall over the same period a year earlier - and furniture and household goods dropped by 1.5%, a smaller decline than a fall of 3.3% a year earlier.

By contrast, clothing and footwear prices fell by the most between December and January in seven years as retailers, with their stores closed, tried to offload stock.

The impact of the pandemic on Britons’ shopping habits led to a re-weighting of the basket of goods and services that the Office for National Statistics uses to calculate inflation.

Food and furniture now have a bigger impact on the index while air fares and cinema tickets now count for less.

The ONS said the overall impact of the change had no significant effect on the CPI.

British inflation has been below the BoE’s 2% target since mid-2019 and came close to zero last year as the economy tanked.

The BoE expects it will accelerate in the spring as last year’s emergency cut in value-added tax for the hospitality sector expires and global oil prices rise on expectations of recovery.

But the BoE has stressed it will be in no hurry to start removing its huge stimulus.

Yael Selfin, an economist at KPMG, said inflation might remain below 2% in 2021 and 2022, “allowing for a longer period of low interest rates to support the economic recovery.”

Economists think prices of some imports will rise because of Britain’s new, less open trading relationship with the European Union which led to disruption and delays at ports last month.

The ONS said it saw no evidence that Brexit-related custom fees and transport costs pushed up consumer prices in January.

But Samuel Tombs, at Pantheon Macroeconomics, said higher annual price rises for furniture and household appliances might reflect higher shipping and Brexit-related costs.

A core version of the CPI, excluding volatile fuel and food prices, held steady at 1.4%.

Factory gate prices fell again, dropping by 0.2% on the year, while the measure for core output prices rose by 1.4%.

British house prices rose at the fastest rate in more than six years at the end of 2020, official figures showed on Wednesday, extending a surge driven by a temporary tax break and demand for more spacious housing since the start of the COVID-19 pandemic.

The Office for National Statistics said house prices in December were 8.5% higher than a year earlier, compared with a 7.1% increase in November, the biggest year-on-year rise since October 2014.

Meanwhile, Britain’s economy will narrowly dodge a double-dip recession and will have returned to pre-COVID-19 levels within two years, according to economists in a Reuters poll who said the Bank of England was unlikely to take borrowing costs negative.

The country has suffered the highest coronavirus-related death toll in Europe and the government has reimposed strict lockdown measures to try and stop the virus spreading, dealing a hammer blow to its dominant service industry.

Gross domestic product was forecast to contract 3.0% this quarter, the Feb. 8-11 poll of around 70 economists found, more than double the 1.4% fall predicted last month. Conversely, the median for Q4 was revised up to 0.4% growth from a 2.0% contraction previously.

But Britain is among the leading countries in rolling out vaccines to its population and GDP was expected to grow 4.7% in the second quarter as some restrictions are likely to be lifted. In Q3 and Q4 it will expand 2.7% and 1.5% respectively.

“The UK’s success in vaccinating high-risk groups and the sharp fall in COVID-19 cases suggests the government will on Feb. 22 be able to set out plans for schools to reopen... followed by non-essential retailers in the second half of March and the consumer services sector in the second half of April,” said Samuel Tombs at Pantheon Macroeconomics.