U.K. Inflation Surges to Fastest Since 2014 as Pound Slumps

• U.K. Inflation Surges to Fastest Since 2014 as Pound Slumps

U.K. inflation accelerated to the fastest pace in more than two years in December as the pound’s decline drove a surge in import costs.

Consumer-price growth increased to 1.6 percent, the highest since July 2014, from 1.2 percent in November. That beat the 1.4 percent median forecast of economists. A separate report showed the cost of imports soared at the fastest annual rate in more than five years.

Bank of England Governor Mark Carney warned on Monday that rapidly accelerating inflation will put the brakes on consumer spending this year following sterling’s 18 percent depreciation since the Brexit vote. The BOE, which will publish new forecasts next month, currently expects inflation to breach its 2 percent target soon.

“This is very much the thin end of the wedge and there is plenty more upside to come over the coming months,” said Alan Clarke, an economist at Scotiabank. “We suspect that the bank will turn more hawkish.”

The U.K.’s core rate of inflation — excluding volatile food and energy — picked up to 1.6 percent in December, the fastest since August 2014, the Office for National Statistics said. The retail prices index, another measure of inflation that includes some housing costs, reached the strongest since July 2014.

The cost of imports rose 16.9 percent year-on-year in December, the most since July 2011. Annual growth in factories’ costs accelerated to 15.8 percent, also a five-year high.

As the BOE assesses the outlook and balances its growth and inflation priorities, it says the next move in interest rates could either be a tightening or a loosening. It cut the benchmark rate in August after the U.K. voted to leave the European Union, lowering it to a record-low 0.25 percent.

Economic developments depend heavily on the U.K.’s new trading relationship with the EU. Prime Minister Theresa May is expected to set out her plans in a speech on Tuesday and has signaled that she’s prepared to leave the bloc’s single market for goods and services.