UK inflation forecast to come in shy of Bank of England's 2 per cent target

Data from the RAC shows fuel prices reached a two-year high last month, with petrol and diesel increasing by an average of 2p a litre

INFLATION is forecast to come in just shy of the Bank of England's 2 per cent target when official figures are released on Tuesday.

The Consumer Price Index (CPI) measure of inflation is expected to hit 1.9 per cent in January, as rising food and fuel prices pushes the cost of living beyond 1.6 per cent in December.

The move would see CPI reach its highest level since June 2014 and mark its fourth consecutive month of price growth.

However, Alan Clarke, head of European fixed income strategy at Scotiabank, said a jump in petrol prices could be enough to push CPI to 2 per cent in January.

Data released by the RAC at the beginning of February showed fuel prices reached a two-year high last month, with petrol and diesel increasing by an average of 2p a litre at the pumps.

Ballooning import prices triggered by the Brexit-hit pound are also expected to bump up prices as companies pass on their soaring costs to consumers.

Inflation last reached 2 per cent more than three years when it edged down from 2.1 per cent to 2 per cent in December 2013.

The Bank of England is forecasting inflation to lift to 2 per cent this month, peaking at 2.8 per cent in the first half of next year, before falling back to 2.4 per cent in three years' time.

Howard Archer, chief UK and European economist at IHS Global Insight, has pencilled in inflation of 1.9 per cent for January but said some prices rises could be offset by a discounting drive from retailers.

"The upside for UK inflation in January may have been limited by a number of retailers engaging in aggressive discounting in the January sales after disappointing sales at the end of the year," he said.

Investec predicts inflation will notch up to 1.8 per cent in January, with an upward pressure coming from air fares.

Economist Victoria Clarke said the shortage of vegetables after extreme weather ravaged crops across Europe might have also pushed up prices at the supermarket checkout.

Restaurants and shops have been accused of sparking a lettuce ration in supermarkets by bulk-buying the salad favourite amid a European vegetable shortage.

Rising food prices was one of the biggest contributors to CPI in December, with a jump in vegetable costs pushing food up by 0.8 per cent between November and December, having been flat a year earlier.

The 12-month rate for food prices was still negative, down 1 per cent, but that marked its highest level since July 2014.

The ONS said sterling weakness was a factor in rising food prices but not the sole contributor.

Kristin Forbes, one of the nine rate-setters on the Bank of England's Monetary Policy Committee (MPC), signalled on Tuesday that she was inching closer to voting for a rate rise after becoming increasingly "uncomfortable" with surging inflation given the economy's resilience since the Brexit vote.

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