UK inflation surprise fuels rate hike speculation
According to data from the Office for National Statistics (ONS) the UK returned to inflation in July, with average prices up 0.1% compared to the same period last year.
This is contrary to market expectations, with the majority of analysts predicting that inflation would remain at 0% in July, as it was in June.
The ONS says that a smaller fall in the price of clothing compared to last year helped to boost inflation, with prices down 3.4% between June and July this year compared to a decline of 5.7% between the same two months a year ago.
Transport services, recreation and culture, and miscellaneous goods and services also helped to boost prices, with higher air fares, the increased cost of toys and games and a surge in bank overdraft charges all contributing to consumer prices index (CPI) growth.
As has been the case for a number of months the falling cost of fuel and food dragged the annual rate down, as a much lower oil price compared to a year ago and the supermarkets' ongoing price war continue to have a negative impact.
However, stripping out the effects of energy and food, UK core inflation rose from 0.8% in June to 1.2% in July. Again, this figure beat analysts' expectations for core inflation to remain at 0.8%.
Commenting on the rise in core inflation, Ben Brettell, senior economist at Hargreaves Lansdown, says: "The rise in the core figure suggests that underlying inflationary pressures could be building in the economy, and is possibly the clearest indication yet that the Bank of England might have to raise interest rates sooner rather than later.
"Currency markets seem to agree - sterling jumped around a cent against the dollar, and almost a cent against the euro immediately after the figures were released."
Maike Currie, associate investment director at Fidelity Personal Investing, agrees with Brettell, adding that markets will be watching the Bank of England's next announcement closely.
"The tide could be turning on the era of ultra-low rates. Earlier this month, the Monetary Policy Committee (MPC) minutes showed one member, Ian McCafferty, voted in favour of an interest rate hike. The next minutes could provide some telling insight on whether Carney's vision of a gradual trot towards higher interest rates will in fact turn into a faster gallop," she says.
However, Samuel Tombs, senior economist at Capital Economics, warns against over-enthusiasm, arguing that inflation is likely to remain low for some time: 'Looking ahead, the scale of the recent fall back in oil prices suggests that CPI inflation is still likely to turn negative again over the next few months.
"And while inflation should pick up at the start of 2016 as the anniversary of the plunge in oil prices is reached, pipeline price pressures remain extremely weak while long time lags between changes in import prices and shop prices mean that sterling's recent appreciation will keep a lid on CPI inflation until the end of 2016."
Tombs adds that the inflation outlook is still "too weak" for the MPC to justify raising interest rates this year, with a hike more likely to come in the second quarter of 2016.
This article was written for our sister website Money Observer
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).