Inflation hits 20-month high with 0.6% rise
UK inflation maintained its upward trajectory in July, hitting its highest level for more than 18 months as commentators predict further rises.
The 0.6 per cent rise over the 12 months to August outpaced market expectations and June’s increase, both of which stood at 0.5 per cent.
According to the Office for National Statistics (ONS), the main contributors to the consumer prices index (CPI) increase were rising prices for motor fuels, alcoholic beverages and accommodation services, and a smaller fall in food prices than a year ago.
July’s inflation figure is the first hard economic data covering the period since the UK’s decision to leave the EU on June 23. The previous month’s 0.5 per cent increase had set the UK economy on a strong trajectory for higher prices, given the sterling depreciation witnessed after the referendum.
Pantheon Economics chief UK economist Samuel Tombs said July’s higher than expected figure was entirely due to the fall in sterling..
The forecaster’s own measure of ‘core inflation’ – which also excludes goods affected by government policies – hit 3 per cent in July, the highest level since November 2012 and up from 2.9 per cent in June.
A sharper pick-up in CPI could see the Bank of England (BoE) hold back from additional quantiative easing once its current £60bn quota has been filled, Mr Tombs said.
“CPI inflation likely will exceed 1 per cent by November...and will gain strong momentum in 2017.
“Labour market weakness might constrain wage growth soon, but with productivity also likely to fall sharply as the economy slows, firms’ cost pressures will remain intense. As a result, we continue to think that CPI inflation will hit 3 per cent in the second half of 2017.”
However, Capital Economics UK economist Ruth Gregory said an inflation uptick would not prevent the central bank from further monetary stimulus such as an additional rate cut.
“The drop in the pound should not have a permanent upward impact on inflation expectations or wages growth.
“This is unlikely to prevent the [BoE] from pressing ahead with further monetary policy loosening at its forthcoming meetings – we have pencilled in another cut in Bank Rate to 0.1 per cent in November,” she added.
