Food price rises and clothing costs increased the UK’s inflation rate to its highest point for 5 months in June, exceeding all previous Bank of England forecasts.
The unforeseen rise in inflation rate, as calculated through the Consumer Price Index (CPI), amounted to 1.9% in June, up 0.4% from May. This latest development casts even darker shadows over the hotly contested topic of the timing of the Bank of Englandís hike in interest rates.
Despite market forecasts of an imminent 0.5% interest rate rise by the end of the year, many economists still remain divided on the issue.
Chris Williamson, chief economist at data experts Markit, said: ìThe news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike.î
Alternate data released today by the Office for National Statistics (ONS) indicated that annual house price inflation amounted to a staggering 10.4% in the 12 months to May 2014, representing a 0.5% increase from the previous year-year disclosure in April. The figures illustrate the largest upswing in 4 years and alarmingly the inflation levels are far more drastic in London, where annual inflation on houses has hit a record 20.1%. This is in keeping with BoE governor, Mark Carneyís, warnings of the risk escalating house prices posed to economic growth.
“With inflation almost hitting the Bank of England’s 2.0% target, the housing market booming, the economy growing strongly with no signs of momentum being lost and unemployment plummeting, the case for higher interest rates is building,” added Williamson.
Why has Inflation grown?
Many did not see the rate hike coming, with economists in a recent Reuterís poll predicting a rise to 1.6%, but the ONS identified a number of factors explaining its incidence.
The most significant influence on CPI inflation, the rate that most concerns the BoE, came from clothing and footwear, where prices rose between the last two months. This is particularly unusual, given the recurring downward trend of the articles in question during the same two months in years past. An ONS spokesman said there were indications that this yearís early concentrated period of warm weather caused retailers to hold off their summer sales. The late introduction of these in July could quash the impact had, through their absence, on inflation rates in the past month.
There was a variety of commodities which drew up inflation over the past month; Prices in food and non-alcoholic drinks, aeroplane ticket costs and furniture prices all grew in price this year when they had fallen in the same period of 2013.
The scale of the increase in inflation surprised markets and this was reflected in the poundís strengthening to a year high of $1.7133. The pound has been rising faster than all major currencies over the past year, increasing pressure on the Bank of England to reshape the emergency monetary policy implemented during the economic crisis, with interest rates the focus of prospective reform.
“It currently looks a very close call as to whether the Bank of England will raise interest rates at the end of this year or hold off until early-2015. Indeed, there will undoubtedly be many swings in interest rate expectations over the coming weeks and months,” said Howard Archer, economist at IHS Global Insight.
Government focus was concentrated on inflation levels remaining below the BoEís 2% target.
“The government’s long-term economic plan is working, with today marking the sixth consecutive month that inflation has been below the Bank of England’s 2% target,” said a spokesman.
Before any decision is made on which direction to take, the Bank will also want to see whether wages are picking up in real terms. Figures on pay across the UK are released on Wednesday, however these are expected to show wage increases maintaining their enduring lag behind inflation.