Belfast Telegraph

Air fares and food push inflation to two-and-a-half year high of 1.6%

In flation jumped to a two-and-a-half year high last month as the price of air fares and food rose more sharply than expected, with experts warning of climbing costs for British households in the months ahead.

The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measure of inflation hit 1.6%, up from 1.2% in November, marking the highest level since July 2014.

The move surprised economists, who were pencilling in a 1.4% rise.

Separate figures for the Producer Price Index (PPI) showed that factory gate prices rose 2.7% year-on-year in December as manufacturers started to pass through higher input costs following the collapse of the pound.

Sterling rose on the news, to trade 1% higher at 1.218 versus the US dollar by mid-morning. Against the euro, it was up around 0.3% at 1.138.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, highlighted "unexpected strength" in the inflation figure, adding that CPI is likely to take "bigger upward strides over the coming months".

He said inflation is likely to rise more than 2% in January, and to average 3% across 2017, as rising wholesale costs for goods like food and fuel are passed on to consumers.

British households are likely to be squeezed further by retailers, who have so far mitigated the fall in sterling through hedging practices that include buying dollars in advance, but retailers will be forced to raise prices as those positions expire, he said.

ONS head of inflation Mike Prestwood said rising air fares and food prices, as a well as a shallower fall in petrol prices compared with a year earlier, helped push up inflation in December.

"This is the highest CPI has been for over two years, though the annual rate remains below the Bank of England's target and low by historical standards," Mr Prestwood said.

The jump in food prices was one of the biggest contributors to rising CPI, with climbing vegetable costs helping push overall food up by 0.8% between November and December, having been flat a year earlier.

The 12-month rate for food prices was still negative, down 1%, but that marked its highest level since July 2014.

The ONS said sterling weakness was a factor in rising food prices, but not the sole contributor.

Renewed Brexit jitters sent the pound as low as 1.21 against the US dollar in December, a 19% drop from its pre-referendum high.

A 49% rise in air fares between November and December, compared with 46% a year earlier, contributed to a 2.9% jump in overall transport prices

The cost of living was also pushed up by a shallower drop in fuel prices, which fell 0.4% between November and December, compared with 2.8% over the same period in 2015.

The price of petrol at the pump fell by 0.8p per litre to 114.6p in December, while diesel was steady at 118p.

That was affected by oil production cuts announced by the Opec cartel in November.

The Retail Prices Index (RPI) - a separate measure of inflation that includes housing costs - rose to 2.5%, up from 2.2% in November.