British inflation rose more than anticipated in January, reaching a 10-month high of 3.0%, exceeding economists’ expectations. The unexpected jump challenges the Bank of England’s (BoE)

confidence that inflation is on a steady downward trajectory over the longer term.

A Reuters poll of economists had predicted a rise to 2.8%, up from 2.5% in December, citing contributing factors such as an increase in the cap on bus fares and a tax change affecting private school fees introduced by Prime Minister Keir Starmer’s government. The BoE had also forecast a January inflation rate of 2.8%.

Looking ahead, the central bank projects that consumer price inflation will peak at 3.7% in the third quarter of 2024, primarily driven by rising energy costs and adjustments to regulated tariffs, including domestic water supply charges.

However, BoE Governor Andrew Bailey and his colleagues believe that a cooling labor market will help curb wage pressures in 2024. After a period of wage acceleration in late 2024, they anticipate slower wage growth, reducing the risk of prolonged inflation.

Following the release of the inflation data, the British pound initially rose before returning to its prior level.

One of the key indicators for the BoE, services inflation, climbed to 5.0% in January from 4.4% in December, according to the Office for National Statistics (ONS). Economists and the BoE had forecast a slightly higher increase to 5.2%.

Meanwhile, core inflation, which excludes volatile categories like energy, food, alcohol, and tobacco, rose from 3.2% to 3.7%, aligning with economists' expectations.

With inflation remaining above the BoE’s 2.0% target, policymakers will closely monitor upcoming data to assess the need for potential interest rate adjustments in the coming months.