Image: FlickrInflation saw a big rise in December, but it is set to surge much further.
When you determine the annual inflation rate, what happened a year ago matters. In January 2016, month on month inflation was minus 0.8 per cent. Next month we will get the data for month on month inflation for January 2017. If it is higher than minus 0.8 per cent, which seems very likely, the annual rate will rise again.
In December 2016, month on month inflation was plus 0.5 per cent. And that was enough to increase the annual rate to 1.6 per cent, from 1.2 per cent the month before. It now stands at the highest level for two years.
But it takes time for a change in a currency to fully show up in the inflation data. Sterling fell sharply after the 2008 crisis, but inflation did not peak until the end of 2011.
Not withstanding a rise in sterling seen yesterday, (17th January) after Mrs May's speech on Brexit, the falls in sterling seen since the Brexit vote should be enough to lift inflation much further.
Expect inflation to move close to two per cent, maybe higher next month. Don't be surprised if it passes three per cent by the year end.
As for interest rates, Bank of England governor Mark Carney has suggested there is a limit to how much inflation the bank will tolerate without increasing interest rates.
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics said: "CPI inflation will take bigger upward strides over the coming months, likely exceeding two per cent in January and averaging three per cent during 2016. The contribution of both food and motor fuel prices will rise further as recent increases in wholesale prices are passed on to consumers. Core goods inflation will rise in earnest soon, as retailers’ exchange rate hedges expire, forcing them to increase prices. Services inflation likely will grind higher too as firms endure big increases in minimum wages and non-wage labour costs. The forthcoming rebound in inflation will prevent the MPC from stimulating the economy when it slows this year, but we continue to think that a rate increase remains distant. The MPC has looked through previous bursts of import price inflation and its reluctance to raise interest rates in the two years prior to the referendum shows that the bar to action is high.”
