Bad news for Brits — inflation shoots to 10-year high

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What’s happening?

U.K. retail sales growth continued to fall this month as demand waned despite expectations that Super Saturday and Christmas Day would see strong consumer spending.

The Office for National Statistics, a government department, reported that the three-month inflation reading rose to 2.4% in December compared to November, hitting the highest in 10 years. The rate will prompt the Bank of England to raise rates again as it looks to curb the upward pressure on prices. The Bank of England’s current benchmark interest rate stands at 0.5%, after it raised the rate in November for the first time in a decade.

What’s the background?

The BoE indicated earlier this week that it would likely raise rates again in the near future as inflation took hold of the economy amid sterling’s post-Brexit weakness. Many analysts don’t expect any increases until 2019.

What’s the analysis?

Inflation concerns ran high in December after U.K. growth for the first quarter of 2017 was revised down from 0.6% to 0.4%, while weekly shop prices rose. The December inflation reading hit the BoE’s target of 2%, meaning the bank will move to raise rates next year.

However, the policy doesn’t entirely target the headline rate, but includes a measure known as “core” inflation, that measures the cost of living excluding fuel, food, alcohol and tobacco. According to Wednesday’s figures, core inflation jumped to 2.2% from 2% in November.

The Bank of England said last month that it expects wage growth to return to sustainable levels next year, after two years of bumper earnings increases, but it’s taken into account other measures of wage pressures such as retail prices and npower’s index of average earnings. That means it’s difficult to judge how far-reaching a rate increase will be. “It looks to be marginally more hawkish than they had expected last month, but we suspect it will probably still be the only hike in 2018,” said Markit Chief Economist Chris Williamson.

Who it affects

The BoE is targeting two different inflation measures, the consumer price index, which is used to set the official base rate and the “core” rate, which shows only the core component of inflation, which excludes some items. The publication of core consumer prices growth data for November was delayed until Wednesday by a problem with the ONS’ calculation system.

The pound, an especially sensitive measure to higher inflation, dropped to a fresh two-year low against the dollar of $1.3557 in Wednesday’s trading. GBP/USD traded at $1.3556 before 9:00 a.m. UK time.

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