Spotlight on Bank of England as UK inflation hits 2.9%

British inflation hit its joint highest level in more than five years in August, complicating the Bank of England’s job this week of explaining why it is not raising interest rates.

The fall in the value of the pound since last year’s vote to leave the EU helped drive the biggest rise in clothing prices since the consumer price index was launched in 1997 and rising global oil costs also had an impact.

Consumer prices overall increased by 2.9% compared with a year earlier, the UK Office for National Statistics said, up from 2.6% in July.

That took the CPI back to its level in May. The last time it was higher than 2.9% was in April 2012.

Sterling hit a one-year high against the dollar after the data and it rose strongly against the euro too as investors priced in a greater chance of the Bank of England raising rates for the first time in a decade. British government bond prices fell.

Sam Hill, an economist with RBC Capital Markets, said the Bank of England had been expecting inflation of 2.7% in August and while no change in rates was likely this week, the inflation reading was a challenge for the central bank.

Most members of its Monetary Policy Committee are worried that uncertainty about Brexit will hurt the economy, which slowed sharply in the first half of 2017, and have so far held off on voting for raising rates.

Furthermore, UK households have lost spending power as their wages are left behind by inflation.

The Bank of England targets 2% inflation. It expects inflation to hit about 3% in October, but much of it was due to the fall in the value of the pound which the Bank of England expects to fade out of the inflation figures.

However, a further recent fall in the pound against the euro is likely to keep pressure on British inflation for longer than the Bank of England forecast in August.

The Bank of England is expected to keep the possibility of a rate hike on the radar for investors in its statement this week.

Some economists said three of the MPC’s nine members might vote for a rate hike, up from two last month, with chief economist Andy Haldane joining the dissenters.

Reuters

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