A gauge of UK inflation expectations climbed to its highest level of 2016, as the country’s Brexit decision and a slump in sterling helped push retail prices up in July faster than analysts had forecast.
The 10-year break-even rate, a market measure of expected inflation derived from yield difference between nominal and index-linked gilts, rose to 2.49%, exceeding the yearly high reached last week.
The so-called five-year forward inflation rate, among indicators monitored by the Bank of England, jumped to 3.13%, compared with its past month’s average of 3.03%.
“The breakdown showed that components that typically respond more quickly to exchange-rate movements, such as petrol and food prices, are already putting some upward pressure on consumer-price inflation,” said Ruth Gregory, an economist at Capital Economics in London.
Sterling has dropped about 13% against the dollar since the referendum at the end of June.
Because of that, the Bank of England expects inflation to reach its 2% target faster than previously anticipated, though that did not stop it responding to Brexit’s economic threats with new stimulus this month.
Against the euro, sterling briefly dropped to a new three-year low of 87.22 pence yesterday, before rallying to 86.8 pence.
The yield on 10-year gilts, which are more sensitive to the inflation outlook than shorter-dated securities, was little changed at 0.53% at one stage yesterday. The yield on the UK’s 30-year bond fell two basis points to 1.25%.
“In the aftermath of a significant deterioration in the exchange rate following the EU referendum there is an understandable focus on the extent and speed of pass-through to inflation,” said Sam Hill, Royal Bank of Canada’s senior economist in London.
Since this is first month of data following the referendum result, “it is a bit too soon to expect to be able to discern an explicit direct impact”, Mr Hill said.
“What is more of a theme though in explaining the gradual uptick in inflation is the fading of base effects in fuel prices with the oil price having stabilised,” he said.
He said the jump in the RPI-CPI wedge should normalise in coming months, reducing the impact on break-even rates.
Annual retail price inflation rose to 1.9% from 1.7% in June.
Economists had forecast that the rate would stay at 1.7%, according to the median estimate in a survey.
CPI accelerated to 0.6% from 0.5% in the previous month.
In consumer prices, input costs surged an annual 4.3% last month, breaking a run 32 consecutive declines, while import prices jumped the most since 2011.
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