Inflation edges higher in June as sterling poised for boost

UK inflation jumped higher than expected in June, according to the Office for National Statistics, and is likely start rising even higher due to the slump in sterling since the Brexit vote.

The Consumer Prices Index (CPI) rose 0.5% in the year to June, which was higher than the 0.3% increase a month ago and topped economists' predictions for a 0.4% rise.

Month-on-month, CPI was up 0.2%, the same rate as last month, as forecast.

“Today’s figures were collected before the EU referendum, so recent falls in the value of the pound will have had no impact on them,” ONS statistician Phil Gooding said.

“The rising cost of European air flights, possibly boosted by the Euro football championships, was the biggest reason for this month’s increase in inflation. The growing cost of oil, feeding through to petrol prices, also helped nudge up CPI," he added.

Core CPI, which strips out volatile prices like fuel and food, was up 1.4%, beating last month's 1.2% rise and economists' predictions of a 1.3% increase thanks to upward pressure from toys and hobbies such as computer games.

The ONS said the largest downward pull on inflation in the period comes from grocery prices, while there also continues to be a downward pressure from transport prices, though this has eased. Upward pressures come from a variety of categories, most notably restaurant and hotel bills.

Economist Howard Archer at IHS Global Insight said: "While June’s rise in consumer price inflation had little to do with the pound’s sharp fall since the vote for Brexit, sterling weakness does look set to increasingly feed through over the coming months to markedly push inflation higher as it raises prices for imported goods and services, oil and commodities. We suspect that the pound is headed for further weakness despite its recent stabilization."

Archer forecasts consumer price inflation, helped by the soft pound, will rise to around 1.5% by the end of 2016, moving above the Bank of England's 2.0% target around spring 2017.

Ben Brettell at Hargreaves Lansdown said the sterling-boosted inflation will only be temporary, assuming the currency remains weak, as the effect falls out of the year-on-year calculation in the second half of next year.

"Underlying inflationary pressure is hard to see, with Brexit-related economic uncertainty likely to dampen both consumer spending and wage growth in the short term," he added. "As such the Bank of England is almost certain to ignore what should be a temporary spike in inflation when it sets monetary policy. Most members of the MPC believe interest rates will be cut in August, despite the hawkish Marin Weale indicating yesterday he would not back a reduction at next month’s meeting."