UK inflation spikes unexpectedly to six-month high, sending pound sterling up

City of London analysts had expected the rate to decline to 2.4 per cent. Instead it jumped to 2.7 per cent

UK inflation spiked unexpectedly to a six-month high in August, sending the pound up sharply.

The Office for National Statistics said annual inflation in the month was 2.7 per cent, up from 2.5 per cent in July.

City of London analysts had expected the rate to decline to 2.4 per cent.

The ONS attributed to the rise to higher air and sea fares and theatre ticket prices.

The Bank of England also seems to have been caught unawares by the inflation data, having expected inflation to decline to 2.4 per cent in August.

Stronger than expected inflation raises the prospect that the bank could raise interest rates more rapidly than the additional quarter percentage-point rise currently expected by the end of 2019.

The bank increased rates in August in order to head off what it saw as building inflationary pressures in the economy.

Six-month high

“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,” said Ben Brettell of Hargreaves Lansdown.

In the wake of the release sterling jumped to $1.3206, up 0.44 per cent on the day.

Against the euro the pound was up 0.17 per cent at €1.1277.

Core inflation, which strips out volatile food and energy prices, also rose to 2.1 per cent in the month, up from 1.9 per cent previously.

Ruth Gregory of Capital Economics described the latest inflation data as a “nasty surprise” but added: “It does not alter our view that CPI inflation will be back at the 2 per cent target by this time next year.”

The largest upward contributions to inflation in August came from recreation and culture, followed by transport and clothing and footwear.

The ONS also reported that factory gate prices fell 2.9 per cent in August, down from 3.1 per cent.

The statistics agency said that annual house price growth slipped to 3.1 per cent in July, down from 3.2 per cent in June and the lowest rate since August 2013. In London they fell by 0.7 per cent.