Inflation showed surprise jump in July as airfares soar

Inflation rose unexpectedly in July as prices for airfares soared and clothing retailers reined in seasonal discounts, data showed yesterday, raising doubts how quickly inflation will fall this year.

The Central Bank is also hoping that lower inflation will ease the squeeze on Britons’ incomes...

Last week, the Bank of England slashed its inflation forecast, seeing inflation nearly back at its two per cent target by the end of this year.

The Central Bank is also hoping that lower inflation will ease the squeeze on Britons’ real incomes, allowing consumers to spend more and support the recession-hit economy.

Consumer price inflation inched up to 2.6 per cent from 2.4 per cent in June, the Office for National Statistics said, confounding economists’ forecasts for a fall and posting the first rise since March.

The ONS said that airfares jumped 21.7 per cent on the month, the largest rise from June to July since 2004.

The monthly fall in clothing and footwear prices was the smallest June to July drop since records started in 1996 as retailers had started seasonal discounts in June due to unusually wet weather. A fall in inflation is seen as a crucial ingredient for a recovery from the recession the economy tipped into around the turn of the year.

Inflation has fallen sharply from the three-year peak of 5.2 per cent in September 2011, and June’s fall had been much sharper than expected, driven in part by the early summer sales.

The ONS said the fall in clothes prices between May and July was overall similar to previous years.

The Central Bank predicts a further fall to around 1.7 per cent in two years’ time, indicating that it had room to add more stimulus once the current programme to buy £50 billion of government bonds ends in November. Factory gate inflation has slowed the lowest pace in nearly three years in July and business surveys have also shown easing price pressures.

However, core consumer price inflation, which strips out volatile components such as food and fuel, also rose to 2.3 per cent from 2.1 per cent, casting further doubt on whether inflation will fall much further.

In a separate release, the ONS said house prices in Britain rose by 2.3 per cent on the year in June, the same as in May, driven by a 6.5 per cent annual house price increase in London.

However, a survey by the Royal Institution of Chartered Surveyors showed yesterday that British house prices experienced their most widespread falls for a year in the three months to July, and surveyors do not expect the outlook to improve over the next 12 months.

The longer-running RPI measure for inflation rose unexpectedly to 3.2 per cent from 2.8 per cent, which will have knock-on effects next year because July’s figure is used to index rail fares in England and Scotland.