LONDON (AP) – Inflation in Britain spiked up to 2.9 per cent in the year to August, official figures showed yesterday, in a development that has stoked market speculation the Bank of England may raise interest rates sooner than expected.
The Office for National Statistics said the increase from the previous month’s 2.6 per cent rate was largely due to rising prices for clothing and motor fuels.
The scale of the increase was not expected – the consensus in the markets was that inflation would increase to 2.8 per cent.
Following the higher than expected reading, the pound struck its highest level in a year against the dollar, a clear signal that traders, at least, think that borrowing rates will be increased soon. Soon after the news, the pound was up 0.8 per cent at $1.3268. The pound was also in the ascendant against the euro, which was down 0.8 per cent at 0.90 pound.
Inflation is now well above the Bank of England’s target of two per cent, which is likely to stoke speculation that the central bank may raise interest rates sooner rather than later to keep a lid on prices in the economy.
However, policymakers are expected to keep the bank’s benchmark interest rate at the record low of 0.25 per cent at their meeting tomorrow.
“The inflation data builds a stronger case for the Bank of England to look at hiking rates but it is not yet strong enough for the monetary policy committee to act this week,” said Neil Wilson, senior market analyst at ETX Capital.
Some economists think this may be the high mark for inflation as the price bump generated by last year’s sustained fall in the value of the pound following the vote to leave the European Union begins to fall out of the annual comparison.
The lower pound has made imports, especially of food and energy, more expensive.
“Beyond the currency effect there appear to be few underlying inflationary pressures,” said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown.
“Labour costs are the main factor in domestic inflation, and growth here remains below long-term averages.”