UK inflation rate increase fuels interest rate speculation

The Consumer Price Index (CPI) measure of inflation increased by 0.1 per cent last month; but inflation remains well below the Bank of England’s two per cent target having hovered around zero since February.

The Office for National Statistics (ONS) attributed clothing prices to last month’s rise, as retail outlets offered fewer bargains in their summer sales. In addition, air fares were on the increase which rose more sharply in July year-on-year despite considerably lower oil prices in 2015.

Economists tend to believe that a significant increase in the core rate of inflation would be greeted with a sigh of relief from some Bank of England policymakers, who have gone to great lengths to insist British households the nation is not on the brink of complete deflation.

The core measure rose to 1.2 per cent from 0.8 per cent in June – the highest it has been in five months.

Philip Shaw, economist, Investec, believes those attempting to predict when the first rise in interest rates will be since the economic downturn are still firmly in the dark.

“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,” said Shaw.

Inflation has remained below the Bank’s target for the last 19 months and in April fell into negative territory for the first time in 50 years.

Alan Clarke, economist, Scotiabank, believes Bank of England policymakers would take some comfort from the latest figures.

“The Bank of England are focusing more heavily on domestically generated inflation and core inflation – and there are two clear signs of upward pressure here – clothing and airfares,” said Clarke.

“The latter is striking because oil is 50 per cent 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.”

Date published 19 Aug 2015 | Last updated 19 Aug 2015