The UK’s inflation rate increased to 1.6% in December 2016 - the highest rate seen for two and a half years, according to figures published today.
The Office for National Statistics (ONS) says an increase in food costs and air fares contributed to the rise in the Consumer Prices Index (CPI).
December’s rate of inflation was higher than anticipated, despite the continued weakness of sterling since June’s EU referendum vote. Last month inflation stood at 1.4%, and December’s figure is the highest total since June 2014 – when inflation also reached 1.6%.
Analysts now expect inflation to rise above and beyond the Bank of England’s 2% target during 2017.
Tom Stevenson, investment director for personal investing at Fidelity International, says: “Inflation is back with a vengeance. The weakening pound continues to drive prices higher and today’s CPI reading of 1.6% on the back of rising fuel, food and air fares is significantly higher than expected.
“With inflation set to surge past the Bank of England’s 2% target over the course of 2017, along with Mark Carney’s willingness to look through a temporary rise in prices, savers will increasingly be thinking about how they can make their money work harder.”
Kate Smith, head of pensions at Aegon, adds: “Today’s increase in price inflation is a sharp reminder that people’s buying power can change over a relatively short period of time and this can be particularly hard for those on fixed incomes, which includes many pensioners.
“Increasingly people are living 20 or more years in retirement and even low-level inflation can erode the value of retirement income over time. In under 20 years the value of £100 has more than halved, which could severely restrict pensioners’ spending power and quality of life.”
The Retail Prices Index (RPI) rate of inflation, which unlike CPI includes housing costs, rose to 2.5% in December, up from 2.2% in November.