U.K. inflation rate rises less than expected

U.K. inflation picked up less than economists forecast in January as clothing-store discounts kept the rate from reaching the Bank of England’s target.

The increase in the rate to 1.8 percent from 1.6 percent in December fell short of the 1.9 percent estimated in a Bloomberg survey. The pound weakened and traders pared bets on a Bank of England interest-rate hike by the end of 2017.

While less than anticipated, inflation is still running at the fastest pace in more than two years. Rising fuel costs coupled with a weaker pound are set to push it above the BOE’s 2 percent goal soon, with some economists forecasting it will hit 3 percent by the end of the year. In a sign of the upward pressure, annual growth in factory input costs surged to the fastest since 2008.

In January, clothing prices fell 4.2 percent on the month, pulling annual inflation in that category back to zero, the Office for National Statistics said. The biggest upward effect on headline inflation came from motor fuels. Food prices fell the least in more than two years.

“The downside surprise entirely reflected a pull back in clothing inflation,” said Samuel Tombs, an economist at Pantheon in London. “We continue to expect inflation to rise sharply over the coming months.”

Sterling was down 0.4 percent at $1.2481 as of 10:05 a.m. London time. The odds on a BOE rate hike by the end of the year slipped to 24 percent from 29 percent on Monday.

BOE Forecasts
The BOE sees inflation accelerating through this year and peaking at 2.8 percent in early 2018 after the U.K.’s vote to leave the European Union slashed the value of the pound. The central bank kept interest rates unchanged this month as policy makers said they could look through a period of faster price gains as long as they don’t get out of hand.

Import costs rose more than 20 percent year-on-year, the most since 2008. Crude oil has surged 88 percent, the biggest jump since the turn of the century.

Higher inflation rates will mean a reduction in households’ spending power if wage growth — currently running at 2.7 percent — doesn’t also pick up. Wireless-speaker maker Sonos said on Monday it will raise the cost of its products in the U.K. by as much as 25 percent, becoming the latest in a string of companies to blame the weaker pound for a price hike.

Based on CPIH, which includes some housing costs, inflation was 2 percent in January. It will become the headline measure next month, though the BOE will continue to target the CPI figure.

While the BOE has a “neutral” stance on interest rates, some policy makers have begun to raise concern about the pickup in price growth after the economy performed better than expected in the second half of 2016.