UK inflation at five-year high

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Europe

The United Kingdom's inflation hit its joint highest level 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 percent in annual terms, and rising global oil costs also hit.

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

That took the CPI back to its level in May.

Reuters Photo

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 percent 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.”

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Source(s): Reuters