UK inflation rose in August, official figures showed today, with the Consumer Price Index rising to 2.9% on the year. The figure came in above analysts’ forecasts of 2.8% and higher than July’s level of 2.6%. The pound rose against the dollar in morning trading as investors backed the idea of an interest rate rise from the Bank of England.
The Office for National Statistics (ONS) said that rising prices of clothing and petrol were the main contributors to the rise in the cost of living. The fall in sterling since the EU referendum continued to push up the prices of imported goods, the ONS said, while a rebound in crude oil prices was having an upward effect on prices at the petrol pump.
Air fares also rose between July and August but at a slower rate than the same period in 2016. The rise in inflation comes after July’s fall in inflation to 2.6%, which led some analysts at the time to suggest that the rise in the cost of living had peaked. The inflation level is above the 2% target of the Bank of England, which makes its interest rate announcement on Thursday this week. Maike Currie, personal investing director at Fidelity Internation said:
“The thorny issue of inflation will be the driving force behind any rate rise decision on Thursday. Economists have suggested that now is finally the time that the Bank takes a more hawkish turn, after eight and a half years of ultra-loose policy.
“Whether or not the Bank talks tough, there is little sign that markets are ready to buy it. In fact the difference in outlook between the bank and investors is becoming pronounced - despite the Bank’s repeated warnings about needing to raise rates sooner and faster than markets expect, markets are pricing in that they will stay at their current 0.25% level until the end of 2018, and not rise above 0.5% until 2021."
The inflation data, released at 9.30am this morning, pushed the FTSE 100 into negative territory after its positive start.
Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond FundCPI said that he expects inflation to remain above target throughout the third and fourth quarters of 2017. “Headline inflationary pressure should begin to moderate in 2018 as the large moves in the pound drop out of the reported numbers,” he said.
Hargreaves Lansdown's Ben Brettell also believes that the rise in inflation will be temporary: "Beyond the currency effect there appear to be few underlying inflationary pressures. Labour costs are the main factor in domestic inflation, and growth here remains below long-term averages."
