UK inflation hits highest rate in nearly two years
UK inflation in September rose unexpectedly strongly to hit its highest level in 22 months, according to the Office for National Statistics (ONS).
The consumer price index (CPI) measure of inflation rose 1% compared to September last year, well ahead of the 0.8% consensus estimate and the 0.6% in August.
CPI was also higher than the 0.9% projection made by the Bank of England’s Monetary Policy Committee in August’s inflation report.
Clothing made the largest upward contribution to inflation, with petrol prices leaping 1.4% in their first positive rate in three years.
The ONS noted that there was no “explicit evidence” that the pound’s fall was having a significant impact on consumer prices just yet.
The month-on-month measure of CPI showed a 0.2% increase, slower than the 0.3% in August but better than the 0.10% consensus.
Stripping out more volatile prices such as energy and food, core CPI rose 1.5%, up from the 1.3% a month ago and better than the 1.4% expected.
Economist Paul Hollingsworth at Capital Economics said the jump in inflation would not trouble the Bank of England governor Mark Carney and deputy governor Ben Broadbent as they have indicated that they are willing to tolerate an overshoot of the target in order to focus on stabilising the economy in the short run.
"The 15% or so drop in sterling on a trade-weighted basis since the referendum has put inflation on a steeper upward trajectory for the next few years. We think that CPI will breach the MPC’s 2% target around spring next year, and will peak at about 3.2% in the first half of 2018, once the direct and indirect effects of the pound’s fall have had time to feed through."
Sam Tombs at Pantheon Macroeconomics predicted CPI inflation likely will average 3% next year and peak at about 3.5% at the end of 2017, which he noted would be more than "a bit" of an overshoot that Governor Carney said he is happy to tolerate.
Tombs said: "A sharp weakening in GDP growth over coming quarters likely will still persuade the MPC to cut interest rates by a token amount in February, but high inflation likely will ensure QE isn’t extended next year."
The pound, which was already back above 1.224 in early Tuesday trade, reacted positively initially to the CPI print before giving up this small gain.
"The pound really has no idea what to do with that inflation data – which shows just what a complicated picture it is right now for forex markets," said analyst Neil Wilson at ETX Capital.