UK inflation reached a two-year high of 1.8% in January, nearing the Bank of England's 2% target, as fuel prices continued to climb higher.
Sterling fell almost 0.5% after it was revealed the UK Core Price Index (CPI) hit 1.8% in January, according to the Office for National Statistics, as rising fuel and food prices hit the consumer.
The pound was down 0.49% against the US dollar to $1.2640 following the announcement, while the FTSE 100 was flat at 7,282.5 points.
January's inflation figure was a move higher from the 1.6% reached in December 2016, and the highest rate since June 2014 when CPI reached 1.9% and then began to fall back towards zero.
In a briefing note, the ONS said: "The strong downward pull on inflation seen in recent years for prices for food has lessened considerably over the last four months. The 12-month inflation rate for food stood at negative 0.4% in January 2017, the highest since June 2014. Transport prices continue to provide the strongest upward pressure."
Overall, transport prices fell by 0.6% between December 2016 and January 2017, compared with a larger fall of 2.5% a year ago. Within transport, the largest upward effect came from motor fuels, with prices rising by 3.4%, having fallen by 2.6% a year earlier.
Within food and non-alcoholic beverages, the upward effect came from a wide range of food products, but prices overall were unchanged in January, having fallen by 0.6% a year ago.
The main downward contribution to the change in the 12-month CPI rate came from clothing and footwear which fell by 4.2%, compared with a smaller fall of 3.1% last year.
Ben Brettell, senior economist at Hargreaves Lansdown, said increasing inflation and the impact of the sterilng falls will start to feed through consumer wallets in 2017: "Sterling has fallen around 12% on a trade-weighted basis since last June's referendum, and as a result producers are facing sharply higher input costs - up 20.5% on a year earlier.
"It is almost unthinkable that cost increases of this magnitude can be fully absorbed, leaving firms with little choice but to pass at least some of the burden onto consumers. By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short term."
Alex Brandreth, deputy CIO and senior fund manager at Brown Shipley, added: "Milton Friedman said that inflation is ‘the one form of taxation that can be imposed without legislation.' That tax to the consumer is rising - CPI in the UK has increased to 1.8% and RPI released today was 2.6%.
"Why is inflation a tax to the consumer? Over the last few years, wage inflation has been higher than retail price inflation so we have all been better off. But over 2017 wages are unlikely to keep pace with inflation, which means that in real terms we are all likely to feel worse off."
James Klempster, head of investment management at Momentum UK, agreed wage inflation is key: "The next key 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.
"Even a small increase in inflation, if persistent, has a material impact on savers over the long term. With the Trump reflation trade, higher growth, a pickup in inflation and greater certainty around the Brexit process dominating markets, we expect equities to continue to outperform bonds through 2017."
Nancy Curtin, chief investment officer at Close Brothers Asset Management, commented: "With inflation coming in at a two-year peak, higher living costs are set to hit consumers' wallets, particularly given the fact wage growth just is not keeping up. However, given the resilience of UK data so far, today's figures may provoke debate amongst Monetary Policy Committee members around the timing of the next rate rise.
"Political uncertainty still looms large in both the UK and the US, which is keeping yields low and investor caution high. Despite the tumbling pound acting as a shock absorber for the economy in the wake of the Brexit vote, and strong industrial output and export figures, the MPC may hold fast until after Article 50 is triggered and business intentions are known."
Adrian Lowcock, investment director at Architas, added: "At 1.8% today's CPI figure for January is slightly below forecasts of 1.9%. The main driver for the rise is the recovering oil price which in January 2016 had plummeted to less than $30 dollars a barrel which had a negative effect on inflation. Going forward the impact of the oil price on inflation will start to fade as the weaker oil prices begin to fall out of the calculation."
"While inflation has under shot the market it is still expected to continue to rise and peak at round 2.8% in 2018."
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