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Inflation begins upward shift with 0.5% June rise

Inflation begins upward shift with 0.5% June rise

UK inflation has returned to an upward trajectory after rising 0.5 per cent in June, above consensus expectations.

The figure, up from May’s reading of 0.3 per cent, puts the UK economy on course for a spike in inflation as 2015’s dramatic falls in commodity prices drop of the measurement period, and a depressed sterling adds to costs.

The Office for National Statistics said the rise in the consumer prices index (CPI) was mainly attributed to air fares, which rose 0.6 per cent compared to a 9 per cent fall in May.

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May’s figure was relatively subdued and below expectations, but June’s increased figure has seen economists predict further increases – particularly in the wake of the UK’s decision to leave the EU.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said underlying services inflation, which removes air fares and other government policy-affected services, rose to 2.9 per cent in June, the highest in over three years.

“CPI inflation now is back on an upward path that likely will see it hit 3 per cent in the second half of 2017, when the impact of sterling’s recent depreciation will be felt most intensely,” he said.

Sterling has fallen to around $1.30 against the dollar following the referendum vote, a fall of more than 10 per cent.

Mr Tombs said inflation’s momentum will significantly pick up in 2017, causing it to overshoot the Bank of England’s (BoE) 2 per cent target.

“Given this strong inflation outlook, expectations that the [Monetary Policy Committee] will unveil a policy bazooka next month look set to be dashed,” he added.

Ruth Miller, UK economist at Capital Economics, said June’s rise was the start of a Brexit-induced upward shift in CPI. However, she said the BoE would likely “look through” the data and increase monetary easing.

“Give it a year, and above-target inflation should be back on the cards again,” she said.

Ms Miller added: “If the after-effects of the 2008 [sterling] depreciation are anything to go by, the drop in the pound should not have a permanent upward impact on inflation expectations or wages growth. As such, we expect the MPC to look through it and focus instead on cushioning the impact of the leave vote on the economy.”