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UK inflation jump puts Bank of England back in spotlight on rates

The Bank of England is seen through the columns of the Royal Exchange building in London. Photo: Neil Hall/Reuters

The Bank of England is seen through the columns of the Royal Exchange building in London. Photo: Neil Hall/Reuters

British inflation hit its joint highest in more than five years in August as households paid more for fuel and clothing, complicating the Bank of England’s job this week of explaining why it is not raising interest rates.

The fall in the value of the pound since last year’s Brexit vote helped drive the biggest rise in clothing prices since the consumer price index was launched in 1997, up by 4.6 per cent in annual terms, and rising global oil costs also hit.

Consumer prices overall increased by 2.9 per cent compared with a year earlier, the Office for National Statistics said, up from 2.6 per cent in July and above the median forecast in a Reuters poll of economists for a rise of 2.8 per cent.

That took the CPI back to its level in May.

Sterling hit a four-week high against the euro after the data as investors priced in a greater chance of the BoE’s Monetary Policy Committee raising interest rates for the first time since before the global financial crisis a decade ago, and British government bond prices fell.

Sam Hill, an economist with RBC Capital Markets, said the BoE had been expecting inflation of 2.7 per cent in August and while no change in rates was likely this week, the inflation reading was a challenge for the central bank.

It is worried that uncertainty about Brexit will hurt the economy and has so far held off from raising rates to avoid adding to a slowdown in growth seen in the first half of 2017.

“I think it will be a real headache for the MPC at the moment,” Hill said. “Inflationary pressure is there but there is also evidence that consumers are having a tough time.”

The BoE targets two per cent inflation but most of its policymakers have voted to keep rates at their all-time low of 0.25 per cent as Britain prepares for the challenge of leaving the EU in 2019.

The BoE said last month it expects inflation to reach about three per cent in October, much of it due to the fall in the value of the pound since the Brexit vote.

A further recent fall in the pound against the euro is likely to keep pressure on British inflation for longer than the BoE forecast in August. But Paul Hollingsworth, an economist with Capital Economics, said he expected inflation to peak at 3.1 per cent in October.

“With mixed signals on the current strength of the economy and the majority of the Committee appearing to be comfortable with a temporary, exchange-rate driven pick-up in headline inflation, we don’t think that the MPC will be panicked into raising interest rates imminently,” he said.

Yesterday’s data hinted at some future price pressure as the costs of raw materials for manufacturers and of goods leaving factories increased slightly. Factory gate prices rose by an annual 3.4 per cent, the first increase in the rate since February. Economists in the Reuters poll had expected growth of 3.1 per cent. Prices paid by factories for materials and energy rose by 7.6 per cent.

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

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