Inflation jumps to 2.9% as petrol and clothing prices rise
Bigger-than-expected inflation hike puts pressure on the Bank of England to raise interest rates
UK inflation rose to 2.9% in August on the back of rising fuel and clothing costs, increasing pressure on Bank of England policymakers who have held interest rates steady for more than a year.
The Office for National Statistics said the inflation rate rose from 2.6% in July, in part due to the drop in the value of sterling after the Brexit referendum, which nudged up prices for imported goods including fuel and clothing. The last time inflation was higher than 2.9% was in April 2012.
“The Bank of England will decide on Thursday whether to raise rates in order to curb inflation with today’s higher-than-expected pick-up cranking up the pressure on the central bank’s policymakers,” The Daily Telegraph reports.
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While the figures may increase pressure on BofE policymakers, the Monetary Policy Committee is expected to hold its key interest rate at 0.25%. But rate markets are pricing in a one-in-three chance of a rise by the end of 2017, compared with one-in-five a week ago, says Bloomberg.
Last month, two of the nine-member Monetary Policy Committee voted to increase interest rates from their record-low of 0.25%. There is speculation that economist Andy Haldane could join them at this week’s meeting.
A 6-3 vote “could prompt a re-appraisal of the potential path of interest rates,” James Knightley, chief international economist at ING in London, told Bloomberg. “But we feel that the economic uncertainty brought about by Brexit will lead the committee to hold fire until there is much greater clarity on the UK’s post Brexit environment.”
Paul Hollingsworth, an economist with Capital Economics, told Reuters that he expected inflation to peak at 3.1% in October “and the subsequent easing of price pressures would probably leave a clear majority of rate-setters voting for no change.”
“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,” Hollingsworth said.
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