Inflation rises unexpectedly

Extract from Redwood Financial’s Economic Review August 2019

The headline rate of inflation edged above the Bank of England’s (BoE) target last month, amid concerns sterling’s recent decline could exert further pressure on prices.

Data from ONS showed that the Consumer Prices Index 12-month rate – which compares prices in the current month with the same period a year earlier – rose to 2.1% in July. This was up from 2.0% the previous month and higher than the 1.9% consensus figure predicted in a Reuters’ poll of economists.

ONS said the biggest upward contributor to July’s figure came from the recreation and culture sector, with a rise in the cost of computer games and consoles having a particularly large impact. An increase in the price of hotel rooms, as well as less discounting of clothing and footwear this summer also had a significant impact on the overall level of prices. 

July’s increase resulted in the inflation rate slightly overshooting the BoE’s 2% target. While government caps on household energy bills may see the rate fall back below target by the end of the year, sterling’s depreciation over the past month has yet to feed through to prices. And some economists have suggested this could result in the cost of living remaining stubbornly high. 

Although the latest inflation data will undoubtedly have been noted by policymakers, it may not actually impact too much on the immediate path of interest rates as monetary policy at the moment appears to be inexorably linked to Brexit. Rates were left unchanged for the eleventh month in a row following the last Monetary Policy Committee (MPC) meeting in early August and most analysts expect the BoE to continue its Brexit waiting game when the MPC next convenes on 19 September.

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