Blame snappy clothes and fast cars.

UK prices are rising faster than the market had expected, with year-on-year gains in the consumer price index of 2.9 per cent, above forecasts for a gain of 2.8 per cent and higher than the previous month’s reading of 2.6 per cent. Motor fuels and record-breaking gains in clothing costs were the main contributors, the ONS said. The figures sent sterling shooting higher.

Gains in the price index including housing costs (the CPIH) rose to 2.7 per cent, from 2.6 in July.

Those gains in clothing and footwear, at 4.6 per cent, are the largest on record, going back to 2006.

The ONS points out that while the weaker pound may well have contributed here, it’s not the only big macroeconomic driver:

All else being equal, the depreciation of sterling seen in 2016 and particularly following the outcome of the EU referendum would increase the prices producers pay for imported goods. Whilst depreciation is likely to increase the cost of imports, other factors determine whether these are passed on to consumers. For example, there were reports of businesses having measures to protect against exchange rate changes in the short-term, often reported as being up to spring this year.

The inflation rate for a range of goods has, however, picked up since last year and the overall rate in the UK is higher than in most other EU countries, including all of the larger western European nations. Depreciation may have influenced this but increasing global commodity prices could also be a factor in the rise in inflation in the UK and the EU overall.

The data, with inflation running above target, underscore a tricky point for the Bank of England, which is expected to leave interest rates on hold on Thursday. On that, ING writes:

Inflation at 2.9% could push the BoE to talk up the chances of a rate rise although Brexit uncertainty leads us to doubt that they will actually pull the trigger.

External members Ian McCafferty and Michael Saunders will again vote in favour of an immediate 25bp rate rise, but the key story will be whether BoE Chief Economist Andy Haldane finally follows through with his threat to vote for a hike. Back in June he warned that “the balance point [between tightening ‘too early’ and ‘too late’]… has shifted. Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.”

If we do get a 6-3 vote for stable policy it could prompt a re-appraisal of the potential path of interest rates, but we feel that the economic uncertainty brought about by Brexit will lead the committee to hold fire until there is much greater clarity the UK’s post Brexit environment.

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