• Air transport saw the biggest August increase on record
• City expected inflation to fall back towards 2% target
• Bank of England dilemma over interest rates intensifies
Dearer air fares, rising food bills and price mark-ups on clothes after the summer sales kept Britain’s inflation rate stubbornly high at 3.1% last month.
The figures, released today by the Office for National Statistics, confounded City expectations that the cost of living, as measured by the consumer prices index, would fall back towards the government’s 2% target.
Air fares rose 16% in August, the sharpest rise for the month on record, while clothing and footwear prices notched up their biggest August rise since 2001 as retailers stocked up with new autumn lines. The ONS said the global jump in commodity prices was having an impact on the cost of food.
Falling fuel prices helped offset some of the increases in air travel, clothes and food but were not enough to bring the annual rate down to the 2.9% level predicted by the City.
The persistently high level of inflation will add to the policy dilemma faced by the Bank of England. It has kept the bank rate at the emergency level of 0.5% for more than 18 months in an attempt to hasten the UK’s recovery from recession but also has a legal duty to hit the 2% inflation target.
Jeremy Cook, analyst at currency broker World First, said: “This figure will exacerbate divisions in the [Bank of England’s rate-setting] monetary policy committee with Andrew Sentance likely to only increase the volume of his calls for interest rate rises as soon as possible. Unfortunately the recovery is still too weak and I forecast February of next year as when rates should rise first.”
Alternative measures of inflation were also higher than expected in August. The Retail Prices Index – which includes more housing costs – fell from 4.8% to 4.7%. The City had pencilled in a drop to 4.6%.
James Knightley, UK economist at ING, said: “Looking to the inflation outlook, there are some concerns about food price inflation and the hike in the VAT rate at the beginning of next year, but the strengthening seen in sterling should at least help to dampen import price inflation in coming months. Meanwhile, a weak economic recovery and the headwinds of major fiscal austerity measures should dampen corporate pricing power and limit the likelihood of second-round price effects in the medium to longer term.”
Source: Larry Elliott, guardian.co.uk