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UK inflation hits 0.2% but rate rise unlikely

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UK inflation rose 0.2 per cent in the year to December, the first time the figure has exceeded 0.1 per cent since January 2015.

However, inflation remains significantly below the Bank of England’s target of 2 per cent and experts say an interest rate rise is unlikely in the short-term.

AJ Bell investment director Russ Mould says: “UK interest rates do not seem likely to increase any time soon and even after seven years of zero interest rates and huge dollops of quantitative easing, central banks are failing to get anywhere near their 2 per cent targets.

“Powerful deflationary forces, including debt, demographics, the dollar and the price-crushing powers of the internet, are pushing back hard at the central banks and the battle lines are still drawn.”

Hargreaves Lansdown senior economist Ben Brettell says although core inflation – which strips out volatile components like food and energy – is up 20 basis points to 1.4 per cent, investors hoping for a UK rate rise “shouldn’t hold their breath”.

He says: “Other economic data has been weak recently – wage growth is predicted to have slowed again when figures are released tomorrow, and productivity remains a puzzle. Recent industrial production figures disappointed, suggesting the UK economy decelerated toward the end of 2015, and is still heavily reliant on consumer spending.”

The Office for National Statistics says movements in transport costs, particularly air fares and to a lesser extent motor fuels, were the main contributors to the rise in inflation from November to December.

Downward pressures from prices for alcohol and tobacco, along with food and non-alcoholic beverages, partially offset the rise.

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