Inflation has jumped to the highest rate for two-and-a-half years, hitting 1.6% as the pound’s sharp drop since the Brexit vote continues to push up costs in the UK.

Official figures for December showed air fares, food prices and fuel all helped to drive the rise from 1.2% in November. The December rate, as measured on the consumer prices index (CPI), was the highest since July 2014 and higher than forecasts for 1.4% in a Reuters poll of economists.

The increase fanned concerns about a squeeze on living standards this year and economists said inflation would continue to climb much higher, leaving households worse off in real terms.

The worries stem from sterling’s drop against other currencies since the vote to leave the EU last summer. A weaker pound has raised the costs of imports such as food and fuel, and businesses are starting to pass that on to consumers. The pound came under more pressure in recent days, dropping below $1.20 at one point, ahead of Theresa May’s speech on the Brexit process. But it recovered markedly after she promised a vote in parliament on the Brexit deal.

Conor D’Arcy, a policy analyst at the Resolution Foundation thinktank, said the latest inflation figures showed the ultra-low price rises that consumers have benefitted from in recent years were “well and truly over”.

“It will be years until we see the overall economic impact of Brexit, but the one dead cert in 2017 is rising inflation fuelled by a sharp fall in the pound. With nominal pay only expected to rise by 2.4% in 2017, the risk is we see a fresh pay squeeze with rising prices eating up all pay growth by the end of the year.”
(The Guardian)