UK consumer price inflation held at 3% in January as underlying prices rose more strongly than expected, scuppering forecasts for a drop back towards the Bank of England's 2% target rate and pressuring for a more aggressive interest rate response.
Data from the Office for National Statistics (ONS) on Tuesday showed that while prices cooled on a monthly basis, falling 0.5% in January, the headline annual consumer price index (CPI) rose by 0.1 percentage point to 3%.
Analysts polled by Reuters had expected the annual rate of CPI to fall to dip to 2.9% as the inflationary effects of a weaker pound during 2017 faded.
The main upward effect, the ONS said, came from price rises for recreational and cultural goods and services such as theatres and cinema, while gains in food and alcohol, clothing, and restaurants and hotels also rose from last year's levels.
This, analysts suggested showed that much of the rise in prices was domestically driven.
Lucy O'Carroll at Aberdeen Standard Investments said: "There are signs that the dynamics in the labour market are finally driving some level of domestically generated inflation.
"We’ve been waiting a number of years for this to happen. So even if inflation drops back a bit further from here, it looks likely to settle at a higher level than the Bank of England feels comfortable with."
Contributions to the CPIH 12-month rate, January 2017 and January 2018
The ONS data showed that underlying inflationary pressures remained. Although producers were able to rein in the costs they pass on to consumers, their input prices continued to rise.
Output prices, often called factory gate inflation, rose by 2.8 annually - down from the 3.3% seen in December, and lower than the 3% predicted by analysts.
Input prices, however, rose 4.7% in January - down from 5.4% seen in December, but higher than the 4.2% analysts had expected.
"Tracking companies’ costs and the amount of spare capacity in the economy suggest that inflation could remain stubbornly high for some time to come," said Chris Williamson at IHS Markit.
"The data indicate that the inflationary impact of the weaker pound is being accompanied by higher global commodity prices, notably for oil, amid the strengthening global upturn."
Rate watchers would have noted the pound's reaction, suggesting expectations were rising that the Bank of England may adopt a more aggressive stance on inflation.
Sterling rose 0.41% against the dollar to $1.3893, and was up 0.23% at £0.8863 versus the euro.
The dilemma for the Bank, however, is that while inflation remains sticky, economic growth in the UK is beginning to stall.
Indeed, the relatively high rate of inflation is much to blame for the economic slowdown, as wage increases for British workers have failed to keep pace with rising prices, putting pressure on household spending.
Would the central bank risk a more aggressive monetary policy stance at the risk of stifling what growth remains?
"The signs of the economy faltering suggest there’s a risk of higher interest rates exacerbating a nascent slowdown," said Williamson.
"While the door remains open for a May interest rate hike, the Bank of England will likely need to see indicators of the economy’s health improve to be sufficiently reassured that the economy is ready for another rise in borrowing costs."