U.K. Inflation Ticks Higher on Its Way Toward BOE’s 2% Target

U.K. inflation unexpectedly accelerated in January, in what economists say is the first step toward a significant increase that could bring the rate close to the Bank of England 2% target later this year.

Prices climbed 0.7% from a year earlier, boosted by the cost of furniture, household goods and food, the Office for National Statistics said Wednesday. The median estimate by analysts in a Bloomberg survey was for inflation to stay at 0.6%.

The BOE sees inflation picking up this year, driven by higher energy prices and the expiry of a sales tax cut for the hospitality industry in April. While that’s unlikely to prompt policy makers to raise borrowing costs, it could silence any voices calling for extra stimulus to aid the country’s economic recovery.

“A temporary period of above target inflation is possible over the summer, although it’s unlikely to prompt a hawkish turn by the Bank of England, which will be focused on the weakness in the labor market,” said Dan Hanson, senior U.K. economist at Bloomberg Economics.

Economists surveyed by Bloomberg expect inflation to end the year at 1.9%. Inflation expectations in bond markets are also on the rise. The U.K.’s 10-year breakeven rate, as well as the five-year forward inflation swap measure are both trading near two-month highs.

The central bank is predicting a rapid economic recovery as the vaccination program now being rolled out allows businesses to reopen and lifts consumer confidence. While analysts largely agree, many also see the pandemic inflicting lasting scars on the labor market.

James Smith, an economist at ING, said he expects inflation to reach 2% by the end of the year, before dipping again below target in 2022. It’s an outlook that doesn’t justify the BOE cutting interest rates below zero, but “also probably won’t warrant rate hikes” or the withdrawal of stimulus until “2023 at the earliest,” he wrote in a report.

Prices are usually discounted at the start of the year, and last month there was particular pressure on clothing and footwear as a third national lockdown to fight the coronavirus led to the biggest price cuts for any January since 2014. However, these were more than offset by rising food prices and less discounting on items such as bedding and sofas.

Clothing and footwear prices fell 4.9%, larger than the 3.3% decline posted a year earlier. The ONS said the proportion of items discounted last month was around 1.5 times higher.

The task of compiling the inflation survey was made harder by the latest lockdown. The number of items that were unavailable for price checking rose to 69 from 9 in December.

— With assistance by Kristine Aquino

(Updates with bond markets, economist comment in fifth, seventh paragraphs.)