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Higher energy bills push inflation above Bank of England target

By Abigail Townsend

Date: Wednesday 22 May 2019

Higher energy bills push inflation above Bank of England target

(Sharecast News) - Inflation crept above the Bank of England's target in April, pushed upwards by rising energy and transport costs, but remained below consensus forecasts, official data showed on Wednesday.
According to the Office for National Statistics, the 12-month consumer prices index, which strips out owner-occupiers' housing costs, was 2.1% in April, up from 1.9% in March.

Although above the Bank's official 2% inflation target, it was below the Monetary Policy Committee's own forecast for 2.2%. Most economists were also looking for 2.2%.

Including owner-occupiers' housing costs, inflation was 2%, up from 1.8% in March. Core inflation, which strips out volatile components such as energy, was unchanged at 1.8%.

The largest upwards contributors to CPI were rising energy prices after regulator Ofgem increased its price cap for standard variable tariffs by 10%, and air fares, which were influenced by the late timing of Easter. Offsetting that were falls in prices across a range of recreational and cultural items, including computer games and package holidays.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The headline rate undershot the consensus due to a slump in core goods inflation, to 0.1% from 0.8%. Inflation in the volatile clothing and games categories fell sharply again.

"Nonetheless, the 2% year-over-year rise in consumer goods import prices, and sterling's recent depreciation, suggest that core goods inflation has hit a floor. Food inflation also likely will rise from April's subdued 0.7% rate soon, given recent increases in domestic producer and import prices."

Tombs, who has pencilled in an increase in interest rates in November, added: "The MPC cannot be complacent about the inflation outlook."

Anthony Kurukgy, senior sales trader at Foenix Partners, said: "Both investors and the UK's central bank will be unfazed by the latest inflation report, despite it breaching 2% for the second time in 2019.

"However, with Brexit-related uncertainties intensifying, sterling's continued demise may force the MPC to be less tolerant that it was in 2016/17 to appreciating inflation, given higher wage growth."

Ed Monk, associate director for personal investing at Fidelity International, said: "At 2.1% inflation can't be described as runaway, but the higher prices under the Bank of England's case for potentially faster interest rate rises than we've been expecting.

"The prospects for economic growth in the UK are improving, and rising inflation reflects that. But of course it comes with a huge asterisk - they are predicting on a smooth Brexit transition, which is still out of reach."

Employment is currently at a record high in the UK and wages are growing after a lengthy period of stagnation. But Brexit continues to weigh heavily on sentiment, with companies deferring investment and shoppers buying fewer big ticket items.

The house market has become more subdued. Using information compiled by HM Land Registry, the ONS said on Wednesday that average house prices in the UK increased by 1.4% in the year to March 2019, up from 1% in February.

That was the first increase in house price inflation since September, but the ONS also noted: "However, over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England."

The lowest annual growth was in London, were prices fell by 1.9% in March, although that was an improvement on February's 2.7% decline.

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