UK CPI inflation edges above expectations in July

Britain’s consumer price index (CPI) beat expectations in July, figures released on Tuesday showed, with rising core inflation figures also surprising economists.

According to the Office for National Statistics (ONS), the index rose 0.1% year-on-year last month compared with expectations for a flat reading.

Core CPI, which strips out the impact of food and energy, was also above forecast, rising 1.2% year-on-year compared with analysts’ expectations for a 0.8%.

Meanwhile, core inflation figure in the UK rose to 1.2% in July, up from 0.8% the previous month.

“This is the sixth month running that headline inflation has been at or very close to zero," said ONS head of CPI Richard Campbell.

"While households will have seen individual prices rise and fall, the overall shopping basket bought by the country remains little changed in price compared with a year ago.

The ONS said the slight increase was mainly due to clothing and footwear, with retailers discounting less heavily in this year's summer sales compared with a year ago. Year-on-year clothing and footwear price inflation jumped to +1.7% from -0.7%.

This was balanced by food and motor fuel prices continuing to fall.

Pipeline price pressures remained weak, with producer price index (PPI) numbers from the ONS showing that output prices were 1.6% lower than a year ago in July.

Economists see pressure building but no rate rise soon

Ben Brettell, senior economist at Hargreaves Lansdown said the surprise jump in core inflation was the key figure rather than the headline CPI rate.

"This figure, which strips out volatile components like food and energy, jumped sharply to 1.2%, confounding expectations for it to remain flat at 0.8%."

He added: "The rise in the core figure suggests that underlying inflationary pressures could be building in the economy, and is possibly the clearest indication yet that the Bank of England might have to raise interest rates sooner rather than later. Currency markets seem to agree - sterling jumped around a cent against the dollar, and almost a cent against the euro immediately after the figures were released."

the recent fall back in oil prices suggests that CPI inflation is still likely to turn negative again over the next few months

Sam Tombs at Capital Economics dismissed the impact of the small rise in headline rate as a timing issue, as it "merely reflects a slight shift in the timing of summer discounting of clothing and so has little bearing on the timing of the first interest rate rise".

"Looking ahead, the scale of the recent fall back in oil prices suggests that CPI inflation is still likely to turn negative again over the next few months. And while inflation should pick up at the very start of 2016 as the anniversary of the previous plunge in oil prices is reached, it still looks likely to remain well below the MPC’s 2% target next year."

Tombs stated that the inflation outlook looked too weak for the MPC to justify raising interest rates this year and so expected it to be postponed until the second quarter of 2016.

if the MPC pulls the trigger too early on rate hikes it’s difficult to see how the BoE’s 2% inflation target will be reached in any reasonable timeframe

Ranko Berich of Monex Europe said the bank will still be cautious about raising interest rates: “While wages are increasing rapidly, this is clearly failing to filter through to inflation. With sterling’s current strength and further fiscal tightness planned for the UK, if the MPC pulls the trigger too early on rate hikes it’s difficult to see how the BoE’s 2% inflation target will be reached in any reasonable timeframe.

He added: “Making an assumption that underlying price pressure will suddenly begin to pick up in the coming quarters is an awfully risky call. If the Bank of England has seemed indecisive over rate hikes in recent months, this inflation report is unlikely to give them any reason to get off the fence and act.”

BNP Paribas economists predicted a slightly earlier hike: "Overall, some of today’s upward surprise to core inflation is likely to reverse in the short term but, equally, core inflation is likely to have bottomed in June and should trend higher through the remainder of 2015. This supports our long-held forecast that the BoE will deliver its first rate hike of the cycle in February 2016."