Inflation has hit its highest level in more than two years, mainly as a result of rising fuel prices.
The Office for National Statistics said that inflation rose by 1.8% in January compared with 1.6% in December – the highest since June 2014.
The main contributor to the increase was the rising price of motor fuel, which went up 3.4% between December and January.
To a lesser extent, food prices also contributed to the increase, which were unchanged between December and January, having fallen a year ago.
The rate was lower than the 1.9% predicted by economists, with upward pressures partially offset by the fall in prices for clothing and footwear.
Interest rates are typically used by central banks as a way of influencing inflation. As inflation rises, this could put the Bank of England under increasing pressure to hike the base rate.
Ian Kernohan, economist at Royal London Asset Management, said: “We expect CPI to rise further and move above target later in the year, as the impact of sterling devaluation takes time to feed through.
“This will squeeze real earnings growth to close to 0%, unless wages rises by more than we expect. We see no interest rate increase from the Bank of England this year or next.”
Agate Freimane, senior investment director at BrickVest, said it was unlikely the rise in inflation would have a significant impact on the commercial or real estate market.
Freimane said: “Typically inflation means higher construction costs, which would eventually lead to increase in real estate prices, however, since the Brexit vote, the demand for real estate, both commercial and residential, has softened, so it is unlikely that developers will immediately pass on the raising costs as a consequence of the inflation to the end customer. In the construction sector, the inflation has been driven by weak British pound affecting the price of imported materials.”
The increase in inflation remains below the Bank of England’s target rate of 2.0%.
Following the EU referendum the value of sterling plummeted. This pushed up import costs, which in turn boosted consumer prices and caused inflation to increase.
The Bank expects inflation to rise “markedly” above the 2% target over the coming months as a result of the weakness in the pound, hitting 2.8% in the first half of 2018.
It is then expected to fall back to 2.4% in three years’ time, before returning close to the target over the subsequent year.
Other forecasters believe it is likely to rise even higher in the coming months – going as high as 4% – as sterling weakness increasingly feeds through to consumer prices.
Howard Archer, chief economist at IHS Global Insight, said: “Sharp rises in producer output and input prices point to further marked rises in consumer price inflation to come.
“The marked pace at which consumer price inflation is rising is uncomfortable both for consumers and for the Bank of England. Consumers’ purchasing power is now starting to be seriously squeezed. Meanwhile, some members of the Monetary Policy Committee are clearly becoming twitchy at the pace at which inflation is currently rising and the potential overshoot of the 2.0% target rate.
“While we believe the next move in interest rates will be up, we do not see this happening before 2019 and it could very well be delayed beyond then.”
Mike Prestwood, ONS head of inflation, said: “The latest rise in CPI was mainly due to rising petrol and diesel prices, along with a significant slowdown in the fall in food prices.
“The costs of raw materials and goods leaving factories both rose significantly, mainly thanks to higher oil prices and the weakened pound.
“Both house prices and rents continue to grow over the year but with some signs of a slowdown in recent months.”
