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Interest rate rise closer after surprise surge in prices: Inflation at 1.9% in June, highest for five months: Economists had expected rise in CPI to be 1.6%

July 16, 2014

Katie Allen



Food price rises and delayed summer clothes sales by high street retailers lifted Britain's inflation rate to a five-month high in June, well above forecasts.

The bigger-than-expected rise in the consumer price index (CPI) measure of inflation to 1.9% in June from 1.5% in May will further cloud the picture for Bank of England policymakers as they weigh up price pressures in the economy and decide when to raise interest rates from their record low. Markets have priced in a rate increase from 0.5% by the end of the year but economists are divided over when the move will come.

"The news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike," said Chris Williamson, chief economist at data specialists Markit, whose business surveys have shown activity picking up.

"With inflation almost hitting the Bank of England's 2.0% target, the housing market booming, the economy growing strongly with no signs of momentum being lost and unemployment plummeting, the case for higher interest rates is building," Williamson said.

Economists in a Reuters poll had forecast a small rise to 1.6% but a combination of factors lifted inflation higher, the Office for National Statistics (ONS) said. The retail price index measure of inflation, which is broader and includes housing costs, also came in stronger than expected, rising to 2.6% from 2.4% in May.

The main upward effects on CPI inflation, the rate targeted by the BoE, came from clothing and footwear, where prices rose between May and June this year but fell during the same period last year, which is typical for the summer sales season. An ONS statistician said there were signs that this year's warm weather prompted retailers to delay their discounts. Economists said this was likely to be reversed in July.

There was also upward pressure from food and non-alcoholic drinks, where again prices rose this year and fell last year. Air fares rose by more this year than in 2013 and furniture prices also picked up more than a year ago.

The unexpectedly strong pick-up in inflation took markets by surprise and the pound strengthened to a session high of $1.7133 after the data. Sterling has risen markedly against other major currencies over the last year as expectations grow that the Bank of England will move before other big central banks to end the ultra-loose monetary policy brought in during the financial crisis.

"It currently looks a very close call as to whether the Bank of England will raise interest rates at the end of this year or hold off until early 2015. Indeed, there will undoubtedly be many swings in interest rate expectations over the coming weeks and months," said Howard Archer, economist at IHS Global Insight.

The Treasury focused on the fact that inflation was still below the target.

"The coalition government's long-term economic plan is working, with today marking the sixth consecutive month that inflation has been below the Bank of England's 2% target," said a spokesman.

The Bank, which sets policy with a view to targeting inflation two years out, will also want to see whether wages are picking up and to what extent they could lift broader inflation in the future months. There was some reassurance for policymakers on pipeline inflation pressures in separate producer prices figures yesterday. The data showed producers' costs continued to fall last month and that there was barely any rise in what they charged customers - so-called "factory gate prices".

The latest figures on pay are out today but are widely expected to show wage rises continuing to lag well behind inflation, so falling in real terms.

"In the near-term, inflation is likely to remain subdued with the producer price inflation figures highlighting a lack of pipeline price pressures while remarkably low wage rate numbers also point to little near-term inflation threat. The strength of sterling will also help limit the upside for inflation," said James Knightley, economist at ING Financial Markets.

But with the economy growing by more than 3% this year and next and jobs being created, spare capacity was being eroded meaning the BoE would want to hike in November to head off higher inflation further out, he added.

"This would also remove political concerns of waiting until early next year when election campaigning is in full swing," said Knightley.

Feeling the heat:

As warm June weather persuaded shoppers to hit the stores for summer clothes, many retailers tried to cash in by pushing back their usual summer sales. Instead of the typical fall in June, clothing and footwear prices were up 0.6% this year, with women's trousers and skirts the main culprits.

Food and drink prices also lifted overall inflation. Bread and cereals rose 1.2% in June while soft drinks were up 1.4%. But fish and fruit prices fell, as did wine and beer, while the cost of spirits and tobacco increased.

For those making an early getaway, air fares were up by 7% and boat journeys went up 5.2%.

Furniture and furnishings picked up 1.5%, but gardening gear fell 0.3%.


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Source: Guardian (UK)


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