The British Pound and UK Inflation: Expectations and Reactions

Paterniano Del Favero
Marzo 22, 2017

The February figure, also the first time inflation has breached the Bank of England's 2% target in that timeframe, and up from 1.8% in January also exceeded consensus forecasts of 2.1%.

Ruth Gregory, UK economist at Capital Economics, says the economy is being affected by the import price shock much sooner than the MPC expected.

"Ultimately, it still seems unlikely that the Bank of England will raise rates given the high degree of uncertainty over Brexit, but today's data certainly highlighted two-sided risks for the outlook from here". Indeed, consumer spending has been the main driver of the United Kingdom economy, helping it grow faster than expected previous year. The new rate is the highest it's been since 2013.

It refers back to the year between September 2007 and 2008, when sterling fell dramatically in value and, as a result, prices for housing and utilities, and food and beverages accounted for around 1.7% of the 2.57% CPI inflation seen during the period. For example, the price of an iceberg lettuce increased by 67.2% between January and February.

Don't panic! Yes, inflation has shot up.

"Higher inflation will squeeze consumer spending to some degree but if the economy remains resilient, the Bank if England should be considering a rise in interest rates to counter the surge in inflation". We expect inflation to hit 3% this year and on its current trajectory real earnings are likely to start shrinking by the summer.

To date pay settlements have failed to respond to rapidly rising prices, meaning there's a good chance pay packets are already shrinking in real terms.

On a monthly basis, CPI rose 0.7% in February, higher than the forecast rise of 0.5% and following a month-on-month dip in January.

Transport prices are the biggest single contribution to the rise and that's down to an increase in the price of oil feeding through to price jumps at the pumps.

Rising fuel and food costs were among the factors driving up the cost of living, according to the ONS.

She commented, 'The good news is that, when rising from a very low level, an increase in inflation can be a good thing for equities as they tend to perform well in the early stages of reflation.

The move is 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 per cent this year. The government itself has spent the past decade herocially borrowing on the UK's behalf, adding more than a trillion pounds to public debt since the global financial crisis of 2008 as it rescues the banks and absorbs the social costs of their near collapse.

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