UK inflation surprises with strongest reading since 2018

London

UK consumer prices accelerated more than expected for a second month in a row, a surprise that may challenge the Bank of England (BOE)'s argument that the surge will be temporary.

Inflation climbed to 2.5 per cent from a year earlier, the strongest since August 2018, according to Office for National Statistics (ONS) data released on Wednesday. The median forecast in a Bloomberg survey was 2.2 per cent.

The jump strengthens the view that the central bank will be forced to raise interest rates as soon as next year. It also shows how inflation is emerging as a test for central banks in major economies, coming a day after US consumer price growth unexpectedly surged to 5.4 per cent.

The pound rose 0.2 per cent to US$1.3843, reversing some of July 13's declines.

Prices for food, used cars, clothing and footwear, eating and drinking out, and fuel rose in 2021 but mostly fell in 2020, resulting in the largest upward contributions to the change in the inflation rate. Motor fuel costs rose 20.3 per cent, the most in more than a decade.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The ONS said people were seeking alternatives to public transport and paying more for it. A global shortage in semiconductors held back production of new cars. Prices for used vehicles rose 4.4 per cent in the month of June, the strongest in records dating back to 1996.

These gains were partially offset by a large downward contribution from games, toys and hobbies, where prices fell this year but rose a year ago.

A separate report showed pricing pressures in manufacturing eased slightly in the last month. Factory raw materials costs rose 9.1 per cent from a year ago in June, slower than the 10.4 per cent gain the month before. Economists had expected an accelerating. The price of goods leaving factories rose 4.3 per cent from a year ago, slower than last month's increase.

The BOE predicts that inflation, which was as low as 0.2 per cent last August, will exceed 3 per cent. But crucially for policy, the central bank has maintained that the pressure would prove temporary.

Governor Andrew Bailey this month dismissed calls for imminent action by saying officials shouldn't overreact to transitory factors affecting prices.

That hasn't stopped a growing chorus of economists predicting that the BOE would raise interest rates as early as next year. Andy Haldane used his last speech as chief economist of the central bank on June 30 to warn that consumer-price growth could reach almost 4 per cent by Christmas. BLOOMBERG