Sudden Jump in UK Inflation Rate

The UK inflation rate has risen sharply, hitting the highest level since 2013. February saw the rate of inflation as measured by the Consumer Prices Index (CPI) hit 2.3%, driven up by rising prices of food and fuel.

The CPI is one of the two biggest methods of measuring UK inflation, alongside the Retail Prices Index or RPI. The CPI, which is measured and recorded by the Office for National Statistics (ONS), measures inflation by tracking the change in cost for a range of common and essential purchases, while the RPI also includes home-related costs such as rent, mortgage repayments, and council tax.

In February, the CPI recorded a sharp jump to 2.3%, compared to 1.8% in January. The RPI similarly recorded a sudden and significant increase, growing from 2.6% in January to 3.2% in February.

A third measure of inflation is now being promoted by the ONS in the form of CPIH. This method of measuring inflation, which is now the prefferred index of the national statistical body, is essentially a modified form of the CPI which also takes account of housing costs as the RPI does. In February, CPIH closely mirrored “vanilla” CPI, as it was recorded as growing to the same rate of 2.3%.

Rising prices of food and fuel were the key drivers of February’s increase in inflation. Last year’s vote in favour of Brexit is believed to be a major root cause. This resulted in a sharp drop in the value of the pound, which in turn caused an increase in the price of imports and a subsequent increase in prices for imported food as well as for oil, which is traditionally priced in dollars and therefore vulnerable to exchange rate shifts.

The increase in the CPI puts the current rate above the target rate of 2% set by the Bank of England. A meeting last week saw one member of the Bank of England committee that sets interest rates vote in favour of an increase, and growth of inflation above the target rate is a major indicator of a potential rate rise. Nonetheles, most economists are predicting that historic low interest rates will not be increased yet.

The jump puts the UK’s rate of inflation at roughly the same level as wage growth, meaning wages are essentially remaining the same in real terms. This could leave consumers vulnerable to decreases in the real spending power of their wages if the inflation rate increases further and this is not reflected by the rate of wage growth.

The Bank of England expects that inflation will continue to rise, peaking next year at around 2.8%. Some forecasters predict a higher peak, exceeding 3%.