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United Kingdom inflation picks up pace, testing BOE patience

12 September, 2017, 14:08 | Author: Jeff Stephens
  • Increased fuel prices is one cause of the inflation rise

The gain came after the biggest rise in clothes and footwear prices in nearly three decades, which surged 2.4% on the month and 4.6% compared with a year earlier.

The monthly measure showed a 0.6% rise in the average price of consumer goods between August and July.

House price inflation in England alone was 5.4% in July.

"Rising prices for clothing and motor fuels were the main contributors to the increase in the rate between July and August", the ONS said.

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Inflation surged to 2.9 percent, more than forecast and way above the BoE's 2 percent target as households paid more for fuel and clothing, complicating policymakers' job of explaining why they are not raising interest rates.

The ONS said excluding oil prices and other volatile components such as food, core consumer price inflation rose by 2.7 percent, stronger than economists' expectations of 2.5 percent.

"Our view is that United Kingdom monetary policy will remain unchanged again this month, although the risk is the MPC sounds increasingly uncomfortable about a sleepy market attitude to interest rates", Deutsche Bank economists Mark Wall and Oliver Harvey said in a note on Tuesday.

However, Ben Brettell, senior economist at Hargreaves Lansdown, said inflation is likely to move lower before the end of the year: "It looks likely that inflation will fall back in the coming months, as the effect of Brexit-induced sterling weakness falls out of the year-on-year calculation".

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The BOE's dilemma contrasts with the landscape faced by central banks including the U.S. Federal Reserve and the European Central Bank, which are instead facing subdued inflation despite above-par growth.

"I see more deflationary forces than inflationary in the world economy at present".

"With the Bank of England meeting this week the hawks may well be emboldened by today's price growth, but with the pay squeeze entrenching itself more deeply month by month the policy hawks (wanting a rate hike) will find their room for manoeuvre sorely limited", said Chris Beauchamp, chief market analyst at IG trading group, said following Tuesday's data.

Two members of the Bank's Monetary Policy Committee are already voting for higher rates, in part in defence of the pound.

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"Over the long term, inflation is rarely a country-specific phenomenon, especially for developed, open, market economies".

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