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UK inflation rise fuels debate over higher interest rates | UK inflation rise fuels debate over higher interest rates |
(about 1 hour later) | |
Britain’s inflation rate ticked higher last month, heating up the debate over when Bank of England (BoE) 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. But inflation is still well below the Bank’s 2% target, having hovered around zero since February. | 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. But inflation is still well below the Bank’s 2% target, having hovered around zero since February. |
The Office for National Statistics (ONS) said clothing prices were the main factor behind July’s 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. | The Office for National Statistics (ONS) said clothing prices were the main factor behind July’s 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. |
Economists said a big rise in the core rate of inflation, which excludes volatile items, such as energy and food, would be greeted with relief by some Bank policymakers, who have sought to reassure households that Britain is not on the brink of all-out deflation. The core measure rose to 1.2% from 0.8% in June, the highest for five months. | Economists said a big rise in the core rate of inflation, which excludes volatile items, such as energy and food, would be greeted with relief by some Bank policymakers, who have sought to reassure households that Britain is not on the brink of all-out deflation. The core measure rose to 1.2% from 0.8% in June, the highest for five months. |
But there were mixed messages overall for those trying to predict the first rise in interest rates since the financial crisis, said Philip Shaw, economist at Investec. | But there were mixed messages overall for those trying to predict the first rise in interest rates since the financial crisis, said Philip Shaw, economist at Investec. |
“Today’s figures tell us little about the timing of the first increase in interest rates, which will depend on bigger picture news on domestic growth, pay trends and perceived downside risks in the global economy,” he said. | |
Related: Rail fares forecast to rise 1% after latest inflation data | Related: Rail fares forecast to rise 1% after latest inflation data |
Inflation has been below the central bank’s 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 would take some comfort from these latest figures, said Alan Clarke, economist at Scotiabank in London. | Bank policymakers 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 figures helped lift the pound and it hit a seven-and-a-half-year high against a basket of other currencies and a seven-week high against the dollar at $1.57. | |
The latest inflation figures also signalled rail fares will rise by 1% from January, given the rise is based on the July retail price index measure of inflation. That rate was unchanged from 1% in June, and unlike the CPI includes housing costs. | |
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. | 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. | 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. | |
Policymakers have also sought to emphasise 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. |