UK inflation has increased – but don't bank on a rate rise just yet

Bank Of England Building

The Bank of England says interest rates are going up. Not quite yet, but at some time in the not too distant future, the monetary policy committee thinks the conditions will be right for borrowing costs to go up.

Mark Carney, the Bank’s governor, has made it clear that the timing of that decision will depend on what the economic data looks like. Unsurprisingly, therefore, every piece of news is seen as having a bearing on whether interest rates will go up in late 2015, early 2016 or later.

The latest cost of living figures were slightly stronger than the City had been expecting. Headline annual inflation, as measured by the consumer prices index, was 0.1% in July, up from 0.0% in June. Core inflation, which strips out volatile items such as food and energy, rose from 0.8% to 1.2%.

Predictably, this was seen as bringing the date of a rate rise closer, and because higher interest rates tend to act as a magnet for global hot-money flows, the pound rose on the foreign exchanges.

This, however, was a knee-jerk reaction. The inflation figures tell us next to nothing about when interest rates are going to go up, for the following reasons.

First, the pickup in CPI inflation was almost entirely due to the timing of the summer sales for clothes and shoes. Shops such as Next and Clarks always cut prices in July, but this year the fall was smaller than in 2014. The reason for that was that some of the discounting was brought forward to June.

Second, annual inflation is likely to fall again next month once the recent drop in oil and commodity prices start to show up in the official numbers. The cost of crude is down 20% on its level at the end of June, and while this has made it cheaper for motorists to fill up at the pumps, the reductions came too late to be included in the June data. Domestic energy bills will come down this autumn.

Third, underlying inflationary pressures remain weak. Sterling’s trade-weighted index – the pound’s value against a basket of currencies – is up 6% since the start of the year, and this makes imports cheaper. Manufacturers are already benefiting from the combined impact of a stronger pound and weaker commodity prices: the cost of their fuel and raw materials fell 0.9% in July.

Inflation will pick up this year as last year’s big falls in oil prices cease to have a downward impact on the annual rate, but it will remain well below the government’s 2% target. The trigger for a rate rise is far more likely to be evidence of a an acceleration in wage growth.

Powered by Guardian.co.ukThis article was written by Larry Elliott, for theguardian.com on Tuesday 18th August 2015 12.23 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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