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Brexit linked weaker pound boosts UK inflation to 1.6%


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Brexit linked weaker pound boosts UK inflation to 1.6%

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Inflation in Britain rose strongly in December – linked to the Brexit vote.

The large fall in the value of the pound against other currencies since last June’s referendum has pushed up the cost of imported raw materials.

Consumer prices rose 1.6 percent compared with a year earlier, up from November’s 1.2 percent increase and more than 1.4 percent forecast from economists surveyed by Reuters.

Analyst James Bevan, Chief Investment Officer at CCLA, believes that could hit the economy: “We have had an immediate pass through of the weaker currency to headline inflation. We have had food price inflation, we’ve had energy price inflation. Whether it is an issue or not really depends on whether inflation now gathers pace and begins to be translated into higher wage inflation, reduced competitiveness and therefore reduced profitability.”

The Bank of England is keeping a close eye on how much British consumers’ spending power could be undermined.

UK central bank Governor Mark Carney said in a speech on Monday that so far Britons are keeping on spending and are even borrowing more to do so: “At present we have a situation where households are almost entirely looking through Brexit-related uncertainties, savings rates are beginning to come down and consumer borrowing has accelerated notably.”

But with Britain’s economic growth increasingly reliant on consumers it is at risk from a fall in spending power.

The financial markets found some elements of Theresa May’s speech on Tuesday soothing which boosted the pound’s value. At one stage it rose nearly 3.0 percent against the dollar and 1.5 percent against the euro.

But it remains substantially weaker than before the Brexit vote – with all that implies for future UK inflation.

The Bank of England 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 3.0 percent, possibly as soon as this summer.

Read the full CPI report from the UK’s Office for National Statistics here

Core inflation, output prices

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.

Data on factory gate prices underscored the inflationary pressures in the pipeline. Output prices rose 2.7 percent, their fastest annual rise since March 2012 although a bit weaker than forecasts of a 2.9 percent increase in the Reuters poll.

Prices paid by factories for materials and energy rose by 15.8 percent, the biggest jump since September 2011.

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