UK inflation jumped above expectations to a six-month high in August, but analysts agreed the surprise rise to 2.7 per cent was largely driven by “noise” and unlikely to persist in the long term.
Headline inflation rose above the market consensus of 2.4 per cent and July’s reading of 2.5 per cent, according to the Office for National Statistics, driven by higher prices for energy and recreational activities like theatre going.
According to Howard Archer, chief economic adviser to the EY Item Club, the sharp rise “appeared to largely be a function of noise, rather than a genuine sign of escalating underlying pressures, with the bulk of the increase coming from the volatile recreation & culture sector.”
Inflation is likely to slow as the year goes on and we move into 2019, he added.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the rise had been driven by “volatile components” as well as the recent depreciation in sterling, and that inflation looked set to fall below 2 per cent next year.
While this doesn’t rule out rate hikes, it gives the BoE “plenty of breathing space and allow it to hold back from raising rates again until the risk of a no-deal Brexit has passed and the economy has materially strengthened,” he said.
However, Ben Brettell, senior economist at Hargreaves Lansdown, suggested the news may be more impactful: “The figures won’t come as welcome news to the Bank of England . . . they’ll be desperate to leave policy unchanged until we get some clarity over Brexit, and won’t want to be forced into a rate rise by accelerating prices.”
While an interest rate rise of 1 per cent is likely in May next year, “a disorderly Brexit would force a dramatic rethink,” he added.
On one of the implications of inflation, Tej Parikh, senior economist at the Institute of Directors said: “Today’s figures underline that meaningful wage growth is still a distant prospect for the time being.”
“Many businesses and households will now be looking to the Autumn Budget for support, and without cost reliefs for businesses, real wage growth will remain tame,” he said.
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