Inflation touches 30-month high on surging fuel prices

Higher fuel prices and a weak pound are proving troublesome

On the wholesale price front, the acceleration in January was driven by higher input costs (non-food primary articles, minerals, fuel, basic metals), which more than offset the tepid food inflation reading (barring sugar) caused by demonetisation, said Nomura's Sonal Varma.

For the month of November, 2016, the final Wholesale Price Index for "All Commodities" stood at 183.5 as compared to 183.1 (provisional) and annual rate of inflation based on final index stood at 3.38 percent as compared to 3.15 percent (provisional) respectively.

Despite increasing, inflation remains below the long-term trend - as the chart shows, inflation was more than 5% as recently as 2011 - however after two years of negligible price growth, 1.8% is still substantial, especially as prices are expected to keep rising due to the weaker pound following the European Union referendum.

This is the lowest level of inflation rate recorded since the new CPI series was launched in January 2014. China's producer prices rose the most in over five years in January, confirming that deflation is firmly in the rear view mirror as the world's largest exporter continues to push global prices higher. "In fact, Consumer Price Index (CPI)-based inflation data that was released yesterday also indicated softening of the food prices", said Patel. That fresh strength may moderate in coming months as year- ago comparisons gradually rise and United States President Donald Trump's policies add uncertainties to the global demand outlook.

The pound has fallen against a weakened dollar, as a jump in inflation to 1.8% in January fell short of investor expectations but took another step towards the Bank of England's 2% target.

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

With the US labor market remaining robust the rising inflation will give the Federal Reserve further impetus to continue normalizing interest rates. In December, the growth in inflation was reported at 3.41 per cent which was largely due to fall in the price of perishable items like fruits an vegetables. Rising energy prices and the weakness of the pound are the main factors behind this expected increase.

This comes at a crucial time for the Bank of England (BoE), which must decide on its policy reaction to any signs of increasing inflationary pressures that United Kingdom consumers could face. The WPI for January'17 is significantly higher than the WPI of (-) 1.07% for the corresponding month previous year.

According to Ecowrap, SBI's ERD expect CPI and core CPI to inch up in the subsequent months as components like education will start to increase because of seasonality.

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