Britain’s inflation rate unexpectedly overshot the Bank of England’s 2% target on Wednesday, raising the cost of living even before sterling’s recent slide has had a chance to feed into consumer prices.
Prices rose at an annual rate of 2.1% in July after 2.0% consumer price inflation in June, the Office for National Statistics said, bucking the average expectation in a Reuters poll of economists for a fall to 1.9%
Earlier this month the Bank of England forecast that inflation would fall to a three-year low below 1.6% in the final quarter of this year, reflecting lower oil prices and government caps on household energy bills.
This is despite a sharp fall in the value of sterling, which has gathered pace since Boris Johnson became prime minister last month with the promise to take Britain out of the European Union on Oct. 31, even if that means leaving without a deal.
Businesses fear a no-deal Brexit would lead to major disruption at British ports, pushing up the cost of imported goods.
Sterling fell 2.4% against a basket of major currencies in July and is now at its lowest since October 2016 GBPTWI=BOEL.
Inflation surged after sterling fell more than 10% in the wake of June 2016’s referendum decision to leave the European Union, peaking at a five-year high of 3.1% in November 2017.
The ONS said it was too soon to be able to identify weaker sterling as the main factor behind July’s rise in prices. Instead, higher costs for hotel rooms, video games and consoles, as well as less discounting to clothes in summer sales, increased the annual rate of inflation, it said.
A Citi/YouGov survey of public inflation expectations on Monday showed the most elevated long-run expectations in six years, and the highest number of households unsure about the short-term direction for inflation since June 2016.
The BoE says that underlying inflation pressures mean it is still likely to need to raise interest rates over the medium term, assuming Britain avoids major disruption on Oct. 31 and the global economy recovers.
Official data on Tuesday showed wage inflation hit an 11-year high of 3.7% in the second quarter, a pace which would normally prompt the BoE to tighten rates.
And Wednesday’s figures showed a measure of core inflation, which excludes relatively the volatile prices of energy, fuel, alcohol and tobacco, rose to a six-month high of 1.9% versus forecasts for it to hold steady at 1.8%.
The ONS figures also suggested some rise in short-term pressure in the pipeline for consumer prices.
Among manufacturers, the cost of raw materials – many of them imported – was 1.3% higher than in July 2018, beating all economists’ forecasts in a Reuters poll and up from a rate of 0.3% in June.
Two thirds of these materials are imported, and subject to increases in cost when sterling weakens, though the ONS said it was not possible to identify a specific effect from a single month’s data.
Manufacturers increased the prices they charged by 1.8% last month compared with 1.6% in June, again stronger than the consensus forecast of 1.7%.
The ONS said house prices in June rose by an annual 0.9% across the United Kingdom, unchanged from May and the joint-weakest increase since November 2012.
The year-on-year decline in house prices in London – which has been hardest hit by concerns about a disorderly Brexit – levelled off slightly to show a fall of 2.7% after a 3.1% drop in June which was the largest since September 2009.