UK annual inflation spikes to 2 1/2-year high, driven by rising fuel and food prices

Office for National Statistics (ONS) released UK January inflation data earlier on Tuesday which showed UK annual inflation picked up to its highest level in two and a half years. UK consumer prices index (CPI) rose by 1.8 percent in the year to January 2017, compared with a 1.6 percent rise in the year to December 2016.

Rising fuel and food prices were seen as the main drivers. These upward pressures were partially offset by prices for clothing and footwear, which fell by more than they did a year ago.

"On our updated forecasts, we still envisage an overshoot of the 2% target for CPI in next month’s release, reflecting both the upward push from weaker sterling as well as what seems like a final boost for now from forecourt fuel prices. We expect CPI to peak at around 3.2% in 2017 Q4." said Lloyds bank in a report.

January inflation missed forecasts for a 1.9 percent rise but was still the highest level since June 2014 and is edging closer to the Bank of England (BoE) target of 2 percent. Earlier in February, the BoE forecast inflation will rise above 2.7 percent in a year's time as Brexit pushes costs of imports higher.

“Bank of England Governor Mark Carney has outlined how policymakers are prepared to look through this increase in inflation, keeping policy on hold amid the heightened uncertainty that the UK economy faces during the process of withdrawing from the EU. However, coming months will likely see some itchy trigger fingers among some of the hawkish members of the Monetary Policy Committee, as price pressures mount and inflation spikes higher." said Chris Williamson, Chief Business Economist, IHS Markit