Inflation rises to 20-month high

INFLATION rose in July to its highest level in 20 months as figures for the first full month since the UK voted to leave the EU were revealed.

The Consumer Price Index (CPI) came in at 0.6%, which was ahead of economists’ expectations, although the consensus is for inflation to move steadily upwards in the months ahead.

It is the second consecutive month the CPI rate has risen, having been at 0.3% in May. Inflation was close to zero for most of 2015.

The Retail Price Index (RPI) figure for July, which is 1.9%, will be used to set regulated rail fares from next January. It rose from 1.6% last month.

The Office for National Statistics (ONS) said: “Although the small increase in the rate between June 2016 and July 2016 takes it to the highest seen since November 2014, it is still relatively low in the historic context.”

It pointed to the rising cost of fuel, alcohol and accommodation as being the main contributors to the increase in inflation.

Martin Beck, senior economic advisor to the EY ITEM Club, said: “Inflation reached its highest rate for 20 months in July but is still short of the 2% target. We are likely to see inflation continue to rise over the remainder of the year and to climb above 2% by early 2017. However, with core inflationary pressures remaining very muted, in line with the enduring softness of wage growth, we expect inflation to peak at 3%.

“Base effects will become increasingly important as the year progresses, particularly once last winter’s steep fall in petrol prices drops out of the calculation. Sterling’s recent plunge will also gradually start to feed through, with today’s producer prices data suggesting that there is already some evidence that this is beginning to push up manufacturers’ input costs.

“Therefore, while a rise in inflation is likely to bring an end to the recent improvement in household spending power, the drag from rising prices will not be as great as when we last saw the pound dropped sharply in 2008-09.”

The ONS has also analysed the relationship between the value of sterling and inflation, which it says has “a degree of co-movement” between them.

Stronger inflation in 2008 and 2009 was accompanied by a depreciation of sterling and the moderation of inflation during 2014 came alongside an appreciation of sterling against its major trading partners, the ONS said.

However, it added that simultaneous changes in the oil price “make it difficult to be precise about the link between import prices and the CPI”.

The graph uses sterling’s Exchange Rate Index (ERI) data that has been inverted – a depreciation of the currency representing a higher sterling equivalent price for imported goods and services – to show the relationship.

The recent significant change in the ERI is because sterling fell by 7.3% between early August 2015 and 23 June and a further 9.5% between 23 June and the last day in July.