UK CPI inflation has soared to 3% in January from 2.5% in December as fuel and food lifted average prices.
Economists had expected inflation to increase to 2.8% in January and the higher reading will raise questions about the Bank of England’s next move on interest rates.
“Inflation is back to behaving like a caffeinated flea, bouncing higher in January, after December’s bigger-than-expected fall,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“The bounce was even bigger than the market had expected, so while it’s not going to set off a cacophony of alarm bells at the Bank of England, it’s not going to make them any more enthusiastic about rate cuts in the immediate future either.”
There was a consensus among analysts that while the CPI reading could prevent a rate cut at the BoE next meeting, the inflation spike’s composition meant it was likely to fall again in the coming months and increase the chance of borrowing cost cuts later in the year.
“Inflation returning to 3% should, oddly, not be too alarming,” said George Lagarias, Chief Economist at Forvis Mazars.
“The Bank of England tends to dismiss energy and food cost spikes, which contributed the most towards price rises, and prefers to monitor the more “sticky” parts of inflation, like wages.”
The market reaction was relatively benign. The pound ticked gently higher against the dollar, and the FTSE 100 showed little signs of movement in early trade.