Inflation has now peaked for 2017 – so hopes the Bank of England. The trouble is, it has come two quarters earlier than the central bank's forecast, and a touch higher.
The BoE forecast in May that the consumer price index (CPI) would top out at 2.8% in the fourth quarter.
Tuesday's data from the Office for National Statistics (ONS) show that CPI hit a near four-year high of 2.9% in May, up from April’s 2.7%.
But this is only mid way through the second quarter. There is now scope for the Bank to be considerably wrong with its forecast.
"Today’s rise in inflation was much stronger than expected, and the annual rate is now above the peak that the Bank of England previously forecast," says Rhys Herbert, Senior Economist at Lloyds Bank Commercial Banking.
But is the Bank right? Does this represent the high water mark for consumer prices in this economic cycle?
The important questions the Bank's monetary policy committee (MPC) now have to consider are:
1. Is 2.9% really going to be the peak?
2. Are there signs that underlying inflationary pressures are easing?
3. Will the MPC have to consider any policy response?
The answers to 1 and 3 will ultimately depend on the answer to 2.
The BoE believes underlying inflationary pressures will ease as the current pace of growth slows over the coming quarters.
It also believes that companies will continue to keep a lid on wage increases, which were an annualised 2.4% in April.
CPI at 2.9% and wage growth just 2.4% represents a significant squeeze on household spending power, which – the Bank believes – will feed through into slower economic growth in the coming months.
Continued growth in house prices is an extra burden on consumers.
ONS figures showed on Tuesday that the house price index for May rose by a greater than expected 5.6%. This was up from 4.1% in April and goes against forecasts of a 3.6% rise.
This data goes against that presented by mortgage lenders, Halifax and Nationwide, whose separate house price indexes both dipped in May.
Both, however, suggested the dip was temporary, related to stagnant wage growth.
Amid the slew of data released by ONS on Tuesday, however, there are some signs that inflationary pressures are beginning to ease.
Increases in input prices and factory gate prices both appear to be slowing.
Producer prices at the input level – the cost of raw materials and services used in manufacturing – fell 1.3% month-on-month in May after falling 0.3% in April. Markets expected a fall of 0.5%.
Producer prices at the output level – sometimes called "factory gate" prices – were similarly softer, rising by just 0.1% month-on-month in May, after rising 0.4% in April.
"The rise in price pressures at the start of the supply chain is beginning to slow," says Paul Hollingsworth, UK economist at Capital Economics.
Like many, Hollingsworth believes the weak pound has exacerbated inflationary pressures since it started to materially weaken after 2016's UK Referendum result.
While sterling is unlikely to regain significant ground under the UK's current climate of political uncertainty, the inflationary effects of the weaker pound now appear to be easing.
Hollingsworth continues: "This supports our view that the effects of the drop in the pound have fed through faster than expected, rather than by a larger amount."
Following the data, sterling has found some respite from recent weakness. Against the dollar it climbed 0.6% to $1.2736 and gained 0.6% to €1.1362 versus the euro.
Given expectations that the current peak in CPI above the BoE's target 2% rate is only likely to be temporary, most economists believe the Bank will do little to risk stagnation in economic growth.
"Although inflation has surprised the Bank of England on the upside, we expect the MPC to look through this temporary spike in inflation and hold monetary policy stable until mid-2019," says Amit Kara, head of UK macroeconomic forecasting at the National Institute of Economic and Social Research.
Sam Hill, Royal Bank of Canada's senior UK economist, says: "Along with reduced visibility on the political and fiscal front, it seems likely that the MPC meeting this week will conclude with a ‘wait and see’ message and the neutral stance remaining intact.