UK inflation nudges up driven by rising cost of crisps and fish fingers

INFLATION moved upwards in January despite the national lockdown that has stymied the economy, putting an end to talk of negative interest rates, at least for now.

There were also early signs of Brexit interruption with the cost of furniture and certain foods rising notably.

Consumer price inflation was 0.7% in January, up from 0.6% in December. While that is still very low and economic growth a far bigger factor, City economists think inflation should hit the Bank of England’s 2% target by the end of the year.

Some fear a much bigger spike in prices due to a commodities boom, but that is a minority view for now.

There is a consensus that negative interest rates, mooted by the Bank as a possible remedy to a declining economy, are now unlikely. The next move in rates should be up, not down.

Laith Khalaf, financial analyst at AJ Bell said the latest figures are “horribly distorted by lockdown”.

“The January price variation of some common food items like cauliflowers, crisps and fishfingers suggests there may have been some temporary Brexit disruption at play too,” he added.

Oliver Blackbourn at Janus Henderson said: “Expectations are for a rebound into the end of this year, with the potential for inflation to return to a level close to the Bank of England’s target. As always when exiting a recession, there are competing factors at play when it comes to price pressures. However, gilt yields have clearly responded to a more positive growth outlook from the swift roll out of vaccines and the BoE indications that it does not expect to use negative interest rates any time soon.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said increased furniture costs reflected "the impact of the recent increase in shipping and Brexit-related costs on the price of imported consumer goods".

Melissa Davies, Chief Economist at Redburn commented: “Looking ahead, rising commodity prices, supply chain pressures, the expiry of temporary VAT cuts, and the annualization of last year’s lockdowns should all put powerful but temporary upward pressure on inflation.”