The February figure, also the first time inflation has breached the Bank of England’s 2% target in that timeframe, and up from 1.8% in January also exceeded consensus forecasts of 2.1%.
The figure, released from the Office for National Statistics this morning, pushed sterling upwards and caused a shortlived early correction of the FTSE 100.
Yet experts are pointing to core inflation reaching 2% as a more revealing figure, suggesting a higher oil price is no longer the primary contributing factor to rising inflation.
Joshua Mahony, market analyst at online trading platform IG, said it was “hugely significant”.
He added: “Carney’s indication that a rate rise is as likely as a cut highlights that the BoE are stuck between their desire to ease in the face of Brexit headwinds, and the need to tighten to keep inflation down.”
The market seems to be bringing forward expectations of an interest rate hike while increasing further inflation expectations and a stronger sterling.
Tommaso Mancuso, head of multi-asset at Hermes Investment Management said market consensus was that the inflation overshoot of the 2% target would be temporary.
But he added: “Brexit uncertainty, renewed interest in fiscal policies, ample residual liquidity generated by QE, central banks’ stated intention to ignore an inflation-target overshoot, and rise of protectionism are all factors that could take inflation much higher and for longer than currently anticipated.
“While hills tends to look small from afar, in the midst of the ascent, the climb often proves to be steeper and longer. We believe it is prudent to continue to carry inflation protection.”
Mitul Patel, head of interest rates at Henderson Global Investors, said: “Ultimately the MPC tread a narrow path as they assume this period of high inflation will be temporary.
“Also the failure of wages to keep pace with inflation is likely to lead to a slowing economy over the course of the year.”
But he added if rates began to rise in the US and Europe, it could lead the MPC to take a more hawkish stance, with further weakening in the exchange rate being both “undesirable and unwarranted”.
“Ultimately, it still seems unlikely that the Bank of England will raise rates given the high degree of uncertainty over Brexit, but today’s data certainly highlighted two-sided risks for the outlook from here.”
Ben Brettell, senior economist at Hargreaves Lansdown, pointed to the muted market response.
