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Dearer booze pushes inflation rate to highest for a year

Published 16/02/2016

The Bank of England cut its growth forecasts and voted to keep interest rates on hold at 0.5% at the beginning of this month
The Bank of England cut its growth forecasts and voted to keep interest rates on hold at 0.5% at the beginning of this month

Inflation edged up to its highest rate for a year last month as rises in the price of alcohol and clothing pushed up the cost of living.

The Consumer Prices Index (CPI) measure of inflation rose to 0.3% in January from 0.2% in December, according to the Office for National Statistics (ONS).

Alcohol and tobacco rose by 1.3% compared with January 2015, when there were heavy discounts on beer.

The ONS said inflation also rose as fuel and food prices dropped less than they did a year ago.

But despite the rise in CPI, inflation still remains historically low, with the Bank of England predicting inflation to remain far below the Government's 2% target for some time yet.

Sharply lower oil prices are set to keep a lid on inflation, leaving the UK central bank in no hurry to raise rates above 0.5%, where they have remained for nearly seven years.

James Tucker, ONS head of CPI, said: "While still at historically low levels, CPI has today edged up to its highest rate for a year.

"The main reason for the slight rise in inflation was fuel prices falling by less in January than they did at the same point in the previous year.

"Clothing, food and alcoholic drinks also helped to push up inflation, offset by falling air fares."

The increase to 0.3% marked the third month in a row that CPI has risen, with the rate in January being the same as it was in January 2015.

The ONS said alcohol prices rose 5.2% between December and January, with spirits increasing by 7.5%, beer climbing by 3.6% and wine up 4.8%.

Food prices continued to fall last month, but less than a year ago - by 0.6% between December and January against a 1% fall a year earlier.

Supermarkets have been locked in a price war, as German discounters Aldi and Lidl continue to snap up market share from the Big Four supermarkets.

Fuel prices also dropped last month, but less that a year ago, with petrol falling by 2p per litre between December and January against an 8.5p per litre fall a year earlier.

The average price of petrol on forecourts stood at 101.8p per litre last month, the ONS said.

New Year sales on the high street saw clothing prices fall 3.4% year on year, but dropping less than a year ago.

Shops had been forced to slash prices in December after unseasonably warm weather hit sales of winter clothes.

Air fares fell after sharp rises in December, down 35.8% month on month in January.

Figures from the ONS show the Retail Prices Index measure of inflation rose to 1.3% from 1.2% in December.

The Bank of England has forecast further increases in inflation, to 0.5% by the summer.

But it is likely to remain low for much of this year, with oil prices more than 70% lower than its peak price in summer 2014.

Financial markets are not expecting interest rates to rise until the end of the decade amid mounting gloom over the global economy and the oil price rout.

The Bank cut its growth forecasts for the UK economy and voted to keep interest rates on hold at 0.5% at the beginning of this month.

It revised down its forecast for UK GDP for the next three years - to 2.2% for 2016, 2.4% in 2017 and 2.5% in 2018.

Global markets have been volatile in recent sessions, with banking stocks dragging the FTSE 100 Index into the red amid fears over the impact of slowing world growth, led by easing expansion in China, the world's second largest economy. The London market is down by some 8% since the start of this year.

David Kern, chief economist at the British Chamber of Commerce, expects inflationary pressures to stay "muted" in the coming months.

He said: "Labour costs remain subdued, and any upturn in oil prices will take considerable time to be felt, given recent sharp declines.

"Our forecast remains that inflation will edge up to around 1% in the second half of this year, and is likely to stay below the 2% target until well into 2017. Risks remain associated with the weakening global economic outlook."

A Treasury spokesman said: "Today's low inflation figures continue to show prices growing more slowly than wages, boosting families' spending power with just over a month to go before the introduction of the new National Living Wage, which lands in people's pay packets in April."

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