The annual rate of UK inflation based on the consumer prices index (CPI) increased to 1.6% in December compared to 1.4% in the previous month – the fastest pace of inflation for two and a half years. The latest figures were higher than consensus expectations, suggesting inflation in 2017 could be more significant. The main factor behind the latest jump was higher energy price inflation, although core inflation – which excludes volatile series such as food, energy, alcohol and tobacco – was also higher than expected at 1.6%.

Higher inflation is expected to squeeze household budgets over the course of the year, which is likely to lower demand and spending. Looking ahead, inflation could still double over the course of 2017 as the impact from the post-Brexit fall in the pound feeds through to retail prices. This should lead to a slowdown in growth, although is unlikely to cause a recession.

As for the Bank of England, inflation remained below its 2% target last month, but the target should be exceeded when next month’s figures are released. We continue to expect interest rates to remain on hold despite the increase in inflation, as concerns over Brexit are still likely to keep the Bank of England cautious in its outlook.