UK consumer prices rose 0.7% in February compared with consensus forecasts of a 0.5% gain.
The year-on-year rate rose to 2.3% from 1.8% previously which was above market expectations of an increase to 2.1% and the highest reading since September 2013. The headline rate is also above the Bank of England 2% target rate for the first time since late 2013.
The CPI (H) index also increased 2.3% in the year to February from 1.9% previously, also the highest rate since September 2013, while the RPI rate increased to 3.2% from 2.6% previously.
The underlying annual rate also increased to 2.0% from 1.6% previously and compared with expectations of a smaller advance to 1.8%.
There was further upward pressure on food and transport costs for the month. Food prices rose 0.3% over the year following 31 consecutive months of a negative annual rate. In part, higher prices reflected adverse weather conditions in Europe which put upward pressure on vegetable prices.
A significant element of food inflation could fade quickly and there was a small decline in PPI input prices on the month which will ease upward pressure on costs to some extent, but there will still be wider concerns surrounding inflation trends.
There was also monthly upward pressure on prices in housing and household services with some increase in costs from hotel and restaurants.
At last week’s Bank of England Monetary Policy Committee (MPC) meeting Forbes called for an immediate increase in rates given inflation trends while some other members of the committee stated that only a small increase in expectations surrounding growth or inflation could push them closer to recommending an increase in interest rates.
In this context, the latest inflation rate will tend to increase speculation that the Bank of England will move more quickly than expected to an increase in interest rates with futures markets quickly moving to price in a rate increase for next year.
Sterling moved higher after the release with GBP/USD testing resistance above 1.2450 while EUR/GBP declined to 0.8665. Gilts came under further pressure with 10-year futures down over 50 ticks on the day while equities retreated.