Inflation increases to highest level since November 2014

UK inflation edged higher in July to its highest level since late 2014, lifting sterling from its lows, though official figures released on Tuesday showed core inflation had slipped lower.

Data from the Office for National Statistics (ONS) showed the consumer price index (CPI) rose to 0.6% compared to the same month last year, up from the 0.5% in June that economists expected to be maintained.

Month-on-month data found CPI fell 0.1%, with a decline from the 0.2% increase in June having been expected.

Rising petrol prices and upward moves in the prices of second and cars, food, alcoholic beverages and hotel rooms were the main contributors to the rise in CPI, helped by a smaller fall in food prices than a year ago, which were only partially offset by falls in social housing rent, and falling prices for certain games and toys.

Core CPI, which excludes more volatile prices such as fuel and food, fell to 1.30% in July, as economists forecast, from the 1.40% year-on-year rise the month before.

Having fallen back to multi-year lows in anticipation of bad news from the many ONS announcements this week, the pound's knee-jerk reaction was to bounce on the news, rising 0.8% against the dollar to 1.2983 and returning to 1.1519 on the euro after sinking to three-year lows earlier in the session.

With the retail price index (RPI) also rising 1.9%, up from 1.7% in June and ahead of expectations it would remain the same, another immediate result of the rising prices will be that UK train fares will increase by that same amount.

Economists expect UK inflation data to be one of the most scrutinised releases over the course of the coming year, as observers try to understand the economic impact of Brexit.

“Those who are confident that Bank of England governor Mark Carney can limit inflation to the bank’s stated target will need to consider that the UK hasn’t yet triggered article 50 and signalled the beginning of exit proceedings," said trader Dennis de Jong of UFX. “Though the UK government has hinted that the beginning of Brexit may be delayed until late 2017, the economic consequences of the historic decision will be felt long before then.”

Barclays noted that while CPI was marginally higher than City expectations, it was in line with the Bank of England staff forecast as at the August 2016 Inflation Report.

"Irrespective, we are of the view that the MPC is likely to look through any rise in headline CPI in light of the expected adverse economic shock from ‘Brexit’, which is underscored by the material easing of policy seen at the 4 August meeting, and the expectation that the Committee is to cut the Bank Rate again at the November 2016 meeting alongside the next Inflation Report," they wrote.

Howard Archer at IHS Markit said he expected consumer price inflation to rise to around 1.5% by the end of 2016, moving above its 2.0% target around spring 2017 and reaching a peak around 3.0% in late-2017.

"The UK’s vote to leave the European Union has seen the pound plunge from around USD1.50 to trade as low as USD1.2798 - a 31-year low. IHS expects the pound to trend significantly lower over the coming months to eventually trade around USD1.20 for a prolonged period," Archer wrote.

"Given that oil and commodity prices are largely quoted in US dollars, this is likely to have a particularly marked upward impact on inflation."