British inflation jumped unexpectedly to a six-month high in August, pushed up by bigger-than-usual seasonal increases in sea and air fares and briefly sending sterling above $1.32 for the first time since July.
Consumer price inflation rose to an annual rate of 2.7 per cent in August from 2.5 per cent in July, the Office for National Statistics said – above all forecasts in a Reuters poll of economists that had pointed to a fall to 2.4 per cent.
The ONS also said British house prices rose at the weakest annual rate in nearly five years, dragged down by the biggest drop in London house prices since 2009 – the latest sign of a slack housing market since the 2016 Brexit vote.
Wednesday’s data jolted investors. British government bond prices fell and sterling rose sharply, but it dropped later on a report Prime Minister Theresa May will reject a new European Union plan to solve the Irish border problem around Brexit.
The inflation figures are also likely to surprise Bank of England officials who had expected inflation to cool to 2.4 per cent in August.
The BOE last month raised interest rates for the second time since the financial crisis but pointed to only gradual future increases as it expects inflation to drift down to near its 2 per cent target in three years’ time.
Most analysts doubted the latest jump in inflation reflected a rise in underlying price pressures and was driven mostly by factors like theatre ticket prices that were probably one-offs.
“Despite the overshoot, we are doubtful that we are likely to see any resulting shift in the mood music from those on the U.K.’s Monetary Policy Committee,” Investec economist Victoria Clarke said.
Still, the rise in inflation in August represents a setback to the modest recovery in real-terms wage growth that has helped to support economic growth this year.
The fall in the value of the pound in August on renewed concerns about Brexit deprived consumers of the benefit of a fall in oil prices in annual terms, the ONS figures showed.
Consumer price inflation hit a five-year high of 3.1 per cent last November, when the inflationary effect of the pound’s tumble after Britain’s June 2016 referendum vote to exit the EU reached its peak.
LONDON FALLING
The ONS said house prices in July rose by an annual 3.1 per cent across the United Kingdom as a whole compared with 3.2 per cent in June – the smallest increase since August, 2013.
House prices in London alone fell 0.7 per cent year-on-year in July, the biggest drop since September, 2009.
“Slowing growth in house prices will encourage households to save a larger share of their incomes and will strengthen the case for the MPC to hold back from raising Bank Rate again within the next six months,” economist Samuel Tombs from Pantehon Macroeconomics said.
Despite August’s rise in the headline rate of inflation, the ONS data suggested there could be some relief for consumers in the months ahead.
Prices at British factory gates rose 2.9 per cent year-on-year in August, the weakest increase in four months. Manufacturers’ costs for materials and energy also rose at the slowest pace in four months.