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| UK inflation rise fuels debate over higher interest rates | |
| (35 minutes later) | |
| Britain’s inflation rate ticked higher last month, heating up the debate over when Bank of England policymakers will start raising interest rates. | Britain’s inflation rate ticked higher last month, heating up the debate over when Bank of England policymakers will start raising interest rates. |
| The consumer price index (CPI) measure of inflation edged up to 0.1% in July from zero the month before, defying City expectations for no change and pushing the pound higher. | The consumer price index (CPI) measure of inflation edged up to 0.1% in July from zero the month before, defying City expectations for no change and pushing the pound higher. |
| The Office for National Statistics (ONS) said clothing prices were the main factor behind the rise, as shops offered fewer bargains in their summer sales. There was also some upward effect from airfares, which picked up more than last summer despite sharply lower oil prices. | |
| Those upward factors were only partially offset by falling food prices and cheaper diesel. | Those upward factors were only partially offset by falling food prices and cheaper diesel. |
| “This is the sixth month running that headline inflation has been at or very close to zero. While households will have seen individual prices rise and fall, the overall shopping basket bought by the country remains little changed in price compared with a year ago,” said ONS head of CPI Richard Campbell. | “This is the sixth month running that headline inflation has been at or very close to zero. While households will have seen individual prices rise and fall, the overall shopping basket bought by the country remains little changed in price compared with a year ago,” said ONS head of CPI Richard Campbell. |
| Related: Rail fares forecast to rise 1% after latest inflation data | Related: Rail fares forecast to rise 1% after latest inflation data |
| “The latest slight increase is mainly due to clothing, with smaller price reductions in this year’s summer sales compared with a year ago. Food and motor fuel prices continue to fall and have helped stop a larger rise in the rate of inflation.” | “The latest slight increase is mainly due to clothing, with smaller price reductions in this year’s summer sales compared with a year ago. Food and motor fuel prices continue to fall and have helped stop a larger rise in the rate of inflation.” |
| Inflation has been below the central bank’s 2% target for 19 months and in April fell into negative territory for the first time in half a century, with the CPI basket of prices down 0.1% on a year earlier. | Inflation has been below the central bank’s 2% target for 19 months and in April fell into negative territory for the first time in half a century, with the CPI basket of prices down 0.1% on a year earlier. |
| Bank policymakers debating when best to raise interest rates after more than six years at a record low of 0.5% would take some comfort from these latest figures, said Alan Clarke, economist at Scotiabank in London. | |
| “The BoE are focusing more heavily on domestically generated inflation and core inflation – and there are two clear signs of upward pressure here – clothing and airfares,” he said. | “The BoE are focusing more heavily on domestically generated inflation and core inflation – and there are two clear signs of upward pressure here – clothing and airfares,” he said. |
| “The latter is striking because oil is 50% cheaper than a year ago yet airfares are up. We need another month or two to confirm that this was not a one-off, but so far so good.” | “The latter is striking because oil is 50% cheaper than a year ago yet airfares are up. We need another month or two to confirm that this was not a one-off, but so far so good.” |
| The core rate of inflation, which excludes volatile items, such as energy and food, rose to 1.2% from 0.8% in June, the highest for five months. | |
| That helped lift the pound in morning trading and it hit a high for the day of $1.5672 shortly after the figures. | That helped lift the pound in morning trading and it hit a high for the day of $1.5672 shortly after the figures. |
| The latest inflation figures also signalled how much train fares will go up next year, given the rise is based on the July retail price index (RPI) measure of inflation. That rate, which unlike the CPI includes housing costs, held at 1% in July. | The latest inflation figures also signalled how much train fares will go up next year, given the rise is based on the July retail price index (RPI) measure of inflation. That rate, which unlike the CPI includes housing costs, held at 1% in July. |
| Below target | Below target |
| Some economists say the CPI rate of inflation, which is used by the government as its official measure to set pensions, wages and benefits, could still fall back below zero over coming months and that the Bank should be in no rush to raise borrowing costs. They point to signs of slowing global economy and lower commodity prices. | |
| “It’s hard to see where any significant inflationary pressure will come from in the remainder of 2015 and 2016, and the UK could be on course to see inflation below the Bank of England’s central 2% target until 2017,” said Scott Corfe at the Centre for Economics and Business Research. | “It’s hard to see where any significant inflationary pressure will come from in the remainder of 2015 and 2016, and the UK could be on course to see inflation below the Bank of England’s central 2% target until 2017,” said Scott Corfe at the Centre for Economics and Business Research. |
| “The Bank of England will almost certainly keep rates on hold until the first half of next year. If the global economy weakens further and we start to import more deflation, rates could be on hold for even longer.” | “The Bank of England will almost certainly keep rates on hold until the first half of next year. If the global economy weakens further and we start to import more deflation, rates could be on hold for even longer.” |
| At their latest policy meeting, only one of the Bank’s nine monetary policy committee members, Ian McCafferty, voted for an increase. | |
| Bank governor Mark Carney recently warned households to prepare for a rate rise and suggested it could come around the turn on the year. His fellow rate-setter Kristin Forbes said this week that keeping rates at a record low when the economy was growing at its pre-crisis trend and earnings were rising at a robust pace risked “creating distortions” and interest rates will need to be increased “well before” inflation hits the 2% target. | Bank governor Mark Carney recently warned households to prepare for a rate rise and suggested it could come around the turn on the year. His fellow rate-setter Kristin Forbes said this week that keeping rates at a record low when the economy was growing at its pre-crisis trend and earnings were rising at a robust pace risked “creating distortions” and interest rates will need to be increased “well before” inflation hits the 2% target. |
| Policymakers have also sought to play down fears Britain could be on the brink of all-out deflation and say the low inflation in recent months has largely been driven by non-domestic factors such as the oil price and falls in the cost of other commodities. | Policymakers have also sought to play down fears Britain could be on the brink of all-out deflation and say the low inflation in recent months has largely been driven by non-domestic factors such as the oil price and falls in the cost of other commodities. |
| Oil prices have halved since last summer and the prospect of sanctions being lifted against oil-producing Iran, adding to the glut in supply, has pushed the price of Brent crude to below $50 a barrel. | Oil prices have halved since last summer and the prospect of sanctions being lifted against oil-producing Iran, adding to the glut in supply, has pushed the price of Brent crude to below $50 a barrel. |
| This fall has been passed on to consumers, and recent weeks have seen a flurry of price cuts on forecourts. The ONS said average petrol prices rose by 0.1p and diesel prices fell by 2.5p between June and July this year to stand at 116.5p and 118.7p per litre, respectively. | This fall has been passed on to consumers, and recent weeks have seen a flurry of price cuts on forecourts. The ONS said average petrol prices rose by 0.1p and diesel prices fell by 2.5p between June and July this year to stand at 116.5p and 118.7p per litre, respectively. |