The Office for National Statistics (ONS) has revealed UK inflation climbed to 2.3% in February - above the Bank of England's 2% target for the first time since late 2013.
After hitting a two-year high of 1.8% in January, the UK Consumer Price Index (CPI) rose to 2.3% in the 12 months to February, the highest level since September 2013 and above analysts' forecasts.
Rising transport costs, particularly for fuel, were the main contributors to the increase, while food prices also increased by 0.3% after 31 months of consecutive falls.
The ONS also reported a 19.1% rise in raw material prices, down from 20.1% last month, and a 6.2% rise in UK house prices, an increase from 5.7% the previous month.
Last October, Bank of England governor Mark Carney said he was willing to let inflation temporarily overshoot the 2% target in order to boost economic growth and reduce unemployment. However, in January, he said there are "limits to the extent to which above-target inflation can be tolerated", indicating the Monetary Policy Committee would react to higher prices.
The pound had been rising against the US dollar ahead of the inflation data and soared higher after the announcement to gain 0.9%, trading around $1.24660. Meanwhile, the FTSE 100 was down 0.2% in early trading but reversed some losses to trade around 0.1% lower and 7,417 points by 10.10am.
'No normal recovery'
Adrian Lowcock, investment director at Architas, said CPI could move lower from here: "Despite today's rise, we believe inflation is likely to undershoot expectations. The oil price recovered quickly from the lows in 2016 and its most significant impact on the inflation figure is likely to be in the next couple of months.
"The pound weakness following the Brexit vote is likely to continue to be the main driver for inflation. Whilst we believe we have seen the majority of the falls in the pound following the Brexit result, the knock on effects of higher import prices will continue to be felt. However, this is not a normal economic recovery and it is difficult to predict how easy it is for companies to pass on higher prices to customers. With wage growth slowing households have less capacity to tolerate higher prices."
Ben Brettell, senior economist at Hargreaves Lansdown, said the move higher is bad news for consumers: "Inflation at 2.3% is now higher than the growth in average earnings (2.2%), meaning real pay is officially shrinking. The interplay between these two numbers will be closely watched over the coming months. The UK economy relies heavily on consumer spending and a squeeze on household budgets would not be good news."
James Klempster, head of investment management at Momentum UK, said the pound is to blame: "The weakness in sterling that occurred in the aftermath of the EU vote continued to make itself felt in consumer prices and housing costs throughout February. Given wage growth slowed down significantly during this period from 2.6% to 2.3% this is a serious threat to living standards. The next step is to see how much of this increase in prices can be included in wage negotiation, otherwise we will start to see consumers feeling the pinch in their pockets."
Aberdeen Asset Management's investment manager James Athey said the move higher causes problems for the Bank of England but does not expect an imminent reaction: "Today's inflation print is just going to compound the Bank of England's headache. Their forecasts predict a slowdown in coming months so the last thing that they want to deal with is inflation being above target.
"It is unlikely that they will do anything imminently but they really need to start considering getting rates back to where they were before the referendum. It was a pre-emptive cut that, whether warranted or not, has turbo-charged the depreciation in sterling and given the Bank this inflation headache. Do not expect much anytime soon though. Raising rates would be a proactive and forward thinking move. Two things that the Bank of England is not particularly well-known for."
Viktor Nossek, director of research at ETF provider and sponsor WisdomTree in Europe, said there is no need for investors to panic about runaway prices: "Inflation is not returning to the highs seen during the 1990s - indeed the coming months are likely to represent a peak for CPI if energy prices continue to trend lower, and with signs that economic activity could weaken in the near-term amid a potential slowdown in the UK's dominant services sector."
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