UK Inflation Breaches 3% as Prices Keep Rising

Consumer price inflation hit a near six-year high of 3.1% in November. This means that the Bank of England governor will have to write to the chancellor to explain what he is doing in response, since the consumer price index is more than a percentage point higher than the target 2%.

The rise from 3% in October was driven mainly by transport, where prices rose by 0.1% between October and November, lifted by airfares, news outlets reported.

A Bank of England spokesperson said the letter won’t be published until the February meeting of the nine-member panel, by which time many economists expect inflation to have eased.

Inflation’s sharp rise over the past year or so is directly related to Britain’s vote in June 2016 to leave the European Union. That decision prompted a sharp 15% fall in the pound, which raised the cost of imported goods, notably food and oil.

Largely because that currency impact is a one-off, there are hopes that inflation will start to moderate in the coming months. That’s something that the Bank of England has indicated, too, in its quarterly economic projections.

Interest Rate

However, there have been some signs recently that firms, many of whom held off from passing on to customers the uptick in their costs, are now raising prices. That is creating a second wave of inflation that will cement expectations of higher inflation among the British.

That, in turn, could prompt the Bank of England to raise interest rates again next year—not ideal for the economy when it is struggling with the uncertainties of Brexit and real household incomes are falling as price rises outstrip wage increases.

The BoE is widely expected to keep rates unchanged at 0.5% on Thursday. Investors are watching mostly for signals from the central bank about how soon rates will rise again.

Sterling picked up after the data were published, rising to a session-high of $1.3365, up 0.2% on the day. Against the euro, the pound was 0.1% stronger, with £0.8812 required for a unit of the shared currency, Reuters said.

The Office of National Statistics said that the headline change was due to a consistent number of small price increases across the economy however, rather than due to a small number of heavily weighted changes.

Elsewhere, the retail prices index, which includes the impact of mortgage costs, fell to 3.9%, from 4% last month.

Lucy O’Carroll, chief economist at Aberdeen Standard Investments said: "It’s quite possible that inflation is now close to its peak. But some of the latest surveys suggest that service sector costs and prices are rising. Given how dominant services are in the economy, this could feed through to inflation overall.

"That means that further interest rate rises are definitely not off the table. The Bank of England has a tricky tightrope to walk. Too much inflation could threaten the Bank’s credibility and therefore its grip on the economy."

 $133 Billion Worse Off

Brexit Britain would be economically worse off outside the European Union under most other trade scenarios and exiting without any trade deal at all could see the country's wealth decline by over £100billion ($133.65 billion), a US-based think tank has claimed, Mail online reported.

The Rand Corporation used a mathematical model to forecast changes in GDP growth, GDP per capita, trade and foreign direct investment for the UK under eight different trade scenarios.

According to the economic analysis, a failure to strike any trade deal with the EU would reduce GDP by 4.9%, or £105 billion over 10 years.

The outcome of Brexit negotiations is hanging over the economy, creating the kind of uncertainty that makes business planning very difficult.

Charles Ries, the lead author of the report, commenting on the findings said: "The analysis clearly shows that the UK will be economically worse-off outside of the EU under most trade scenarios. It is in the best interest of the UK and to a lesser extent the EU, to achieve some sort of open trading and investment relationship post-Brexit."