Headline inflation at two-year high

Higher mortgage rates, more expensive petrol and alcohol since the Budget and a seasonal rise in the cost of food pushed the headline rate of inflation last month to its highest level for almost two years. Including all those factors, the RPI jumped to 3.3 per cent from 2.9 per cent in June.

The stock market shrugged off the rise, focusing on an unchanged underlying inflation rate, excluding home loans and indirect taxes, of 2.2 per cent. Despite the highest headline rate since September 1995, when the RPI was 3.9 per cent, the FTSE 100 index of leading shares closed 43.9 points higher at 5075.8.

Economists agreed that the cost of living data justified the Bank of England's recent hint that interest rates were now high enough to contain inflation at its 2.5 per cent target. Despite strong retail sales volumes, the latest figures showed discounting on the high street remained as deep as last year, with consumers demanding lower prices even when they were spending the proceeds of the recent building society windfalls.

On the high street, household goods inflation held steady at 0.9 per cent, while clothing and footwear prices nudged up by only 1.1 per cent. Underlying inflation would actually have fallen had it not been for a jump in seasonal food price inflation which almost certainly reflected recent damage to crops.

The official inflation figures came just before today's quarterly Inflation Report from the Bank of England, which will be its first assessment of the inflation outlook since it assumed operational independence for setting monetary policy. Previously the Bank advised the Chancellor on interest rates, but he could (and often did) ignore its recommendations.

Now the forecasters and policy-makers are the same people, the report will be raked over with a fine tooth-comb by analysts looking for clues about the likely direction of interest rates.

The Government's Paymaster General, Geoffrey Robinson, said he expected to see RPI-X, the underlying inflation measure that excludes only mortgage payments, back down within a couple of months as the full effects of the July Budget showed through in the official statistics.

He said: "Next month we will get the benefit of the cut in VAT on fuel. We are confident we will see inflation come down over the next few months, very much in line with the target we have set."

Last week the Bank increased interest rates by a quarter point to 7 per cent, the fourth rate rise in as many months. It has been concerned that a flood of windfall gains from the conversion of mutually owned building societies to banks would tip already strong consumer spending over into an inflationary boom.

Jonathan Loynes, UK economist at HSBC, welcomed the data: "The figures are much better than they look at first sight, with all of the upward pressure coming from mortgages, taxes and the erratic seasonal food component. Underlying inflation pressures remain very subdued with clear signs that lower costs are feeding through to the high street."

Not everyone was as sanguine. Rosemary Radcliffe, head of economics at Coopers & Lybrand, said she believed the Bank's interest rate "amnesty" might not last long. "Our view is that the Bank will probably need to raise rates further later this year or early next year to control the inflationary pressures now building up."

She predicted a rise in RPI-X from July's 3.0 per cent to 3.4 per cent by the fourth quarter of next year.

Suggested Topics
News
news

Emergency call 'started off dumb, but got pretty serious'

News
people

Britain First criticised for using actress's memory to draw attention to their 'hate-filled home page'

Arts and Entertainment
JK Rowling is releasing a new Harry Potter story about Dolores Umbridge
booksJK Rowling to publish new story set in wizard's world for Halloween
Arts and Entertainment
Benedict Cumberbatch has refused to deny his involvement in the upcoming new Star Wars film
filmBenedict Cumberbatch reignites those Star Wars rumours
PROMOTED VIDEO
News
Russell Brand was in typically combative form during his promotional interview with Newsnight's Evan Davis
people

Thought you'd seen it all after the Jeremy Paxman interview?

Arts and Entertainment
On The Apprentice, “serious” left the room many moons ago and yet still we watch
tv

Greatest mystery about the hit BBC1 show is how it continues to be made at all, writes Grace Dent

News
i100
Life and Style
tech

Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into conflicts
Arts and Entertainment
A scene from David Ayer's 'Fury'
film

"History is violent," says the US Army tank commander Don "Wardaddy" Collier

News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Analyst/Planning and Performance – Surrey – Up to £35k

£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

CTO / Chief Technology Officer

£100 - 125k: Guru Careers: A CTO / Chief Technology Officer is needed to join ...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker