Inflation jumps to 1.6% due to higher food, fuel and air fare costs
Disposable income will feel the squeeze as inflation jumps to 1.6% from 1.2%
DISPOSABLE income faces a further squeeze as inflation has hit its highest level since the summer of 2014.
Figures from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) hit an annual rate of 1.6 per cent in December - up from 1.2 per cent the previous month.
The surge is a bigger than forecast rise, as analysts has predicted it would go up to 1.4 percent.
"Price movements for the majority of the broad groups of goods and services acted to increase the rate between November 2016 and December 2016," the ONS said.
"The main contributors to the increase in the rate were rises in air fares and the price of food, along with prices for motor fuels, which fell by less than they did a year ago."
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"Inflation is back with a vengeance," said Tom Stevenson, investment director at fund managers Fidelity International.
"With more hints from the UK government that a hard Brexit is on the cards, we could see sterling fall even further in the lead-up to the prime minister pulling the trigger on Article 50. This will translate into further inflation in the short term."
May, who has said she will launch formal negotiations for leaving the European Union by the end of March, is due to say today that Britain will not seek a deal that leaves it "half in, half out" of the bloc, according to extracts of her speech.
The Bank of England is watching closely how quickly prices pick up as it tries to gauge the likely impact on spending by consumers, which has helped Britain's economy to withstand the shock of June's decision to leave the European Union.
WHAT HAPPENS WHEN INFLATION RISES?
THE bottom line is that the cost of living will increase. Prices will go up for most things - clothing, food, fuel, travel...will all get a bit more expenses.
This has been fuelled by a weak pound and it means that those on the lowest incomes will be especially hard hit.
Demand for debt advice is already surging. National Debtline has seen a 17 per cent jump in calls compared to last January and a 55 per cent increase in people seeking help online.
Joanna Elson OBE, chief executive of the Money Advice Trust, the charity that runs National Debtline, said: "We are seeing the beginnings of another slow but powerful squeeze on household budgets – and we are likely to see an increase in financial difficulty in the UK as a result.
"For households who are already in a precarious financial position, the risk is that this new squeeze could tip many into problem debt.”
"This demand is likely to continue to grow, in a year that many households could find more difficult than they expected.”
The value of the pound, which has tumbled about 20 percent against the U.S. dollar and 13 percent against the euro since the June referendum - jumped after the inflation data was published, and British government bond prices fell .
The BoE has said it is neutral about which way interest rates might next move. It forecast in November that inflation will exceed 2.7 percent by the end of this year.
But since then the pound has weakened further and international oil prices have risen. Many private-sector economists predict that inflation will hit 3 percent, possibly as soon as this summer.
BoE Governor Mark Carney said on Monday that Britain's recovery was increasingly reliant on consumers which made it vulnerable to the risk of a fall in spending power.
He has said there are limits to how much of an overshoot the central bank will tolerate above its 2 percent inflation target.
Chris Williamson, an economist at IHS Markit, said the stronger-than-expected inflation figure for December would add to speculation that the BoE might start to consider the need for higher interest rates later in 2017.
Retail price inflation - tracked by British inflation-linked government bonds - rose by 2.5 percent in December compared with the same month in 2015, the sharpest increase since July 2014.
Excluding oil prices - which have risen sharply in recent months - and other volatile components such as food, core consumer price inflation was 1.6 percent, compared with economists' expectations for 1.5 percent.
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