Economy 

Inflation nears 3% as prices spike again

Inflation nears 3% as prices spike again

Inflation's summer lull ended in August as price growth spiked to 2.9 per cent following a record rise in clothing costs.

Having dropped back to 2.6 per cent in June and remained at that level in July, the consumer prices index (CPI) inflation figure is now back at the level reached in May. Economists had expected the figure to rise to 2.8 per cent.

The Office for National Statistics (ONS) said the 2.9 per cent figure came about following record annual inflation in clothing and footwear. The area saw prices rise by 4.6 per cent in the 12 months to the end of August, compared with 3.2 per cent in July.

As a result, core inflation jumped to 2.7 per cent, above consensus expectations of 2.5 per cent.

August's figures appear to support the notion of retailers passing on the cost of increased imports due to sterling's decline. However, a lack of domestic inflation may continue to prevent the Bank of England raising rates. The central bank's next Monetary Policy Committee (MPC) announcement is due this Thursday (September 14), with the subsequent decision scheduled for November 2.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said domestic services inflation edged up 0.1 percentage point to 2.7 per cent, still well below its long-term average.

He added: "August’s CPI inflation rate exceeds the MPC’s 2.7 per cent expectation and increases the risk that the it intensifies its rhetoric regarding future interest rate rises.

"We still think the chances of a rate rise this year are remote; domestically-generated inflation is subdued, inflation expectations have remained well-anchored and GDP growth is too weak."

However, MPC members have warned market participants that their future interest rate projections remain too low, suggesting that investors are underestimating the risk of a rate rise. Such statements have been prominent in the committee's last two Inflation Reports.

Rate setters have remained comfortable looking through the above-target inflation due to the impact of sterling weakness. Leila Butt, a senior economist with Prudential, said a risk remains of inflation expectations becoming entrenched.

She said: "Worries about high inflation expectations becoming entrenched and the degree of spare capacity in the economy may well lead to more MPC members voting for a rate hike sooner rather than later."

Clothing and footwear was one of four sub-sectors of the ONS's basket of goods that saw price growth reach a four-year high last month.

"The rise in inflation in [clothing and footwear] may reflect changes in the exchange rate impacting on the cost of imported clothing since [the sector] is one of the most import-intensive categories in the basket," the ONS added.

Food, alcohol and tobacco price growth dropped between July and August but otherwise all sectors experienced inflationary pressure.

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