18th August 2015
Inflation turned positive in July, with the Consumer Prices Index increasing to 0.1% from 0% in June.
The Office for National Statistics put the change down to a slowdown in the fall in clothing prices.
CPI has been nearly flat over the past six months, although it turned negative in April for the first time since 1960.
Ben Brettell, senior economist, Hargreaves Lansdown, says: “The key figure in today’s inflation data was not the headline CPI rate, but the surprise jump in core inflation. This figure, which strips out volatile components like food and energy, jumped sharply to 1.2%, confounding expectations for it to remain flat at 0.8%.
“The largest contribution to the increase came from clothing and footwear, with retailers discounting far less heavily than at the same time last year.”
Brettell adds: “The rise in the core figure suggests that underlying inflationary pressures could be building in the economy, and is possibly the clearest indication yet that the Bank of England might have to raise interest rates sooner rather than later.
“Currency markets seem to agree – sterling jumped around a cent against the dollar, and almost a cent against the euro immediately after the figures were released.”
Brettell explains that the headline CPI rate of only 0.1% is largely driven by a factor outside of the central banks’ control, namely the oil price. Recent further falls mean that it could depress the headline rate of inflation well into next year.
However, he warns that policymakers know this is ultimately a temporary factor, and as such are increasingly looking at the core measure when deciding whether higher interest rates are appropriate.
“Today’s numbers will increase speculation over a rate rise later this year. Possible, but not probable is my view. It will take some time for more MPC members to be persuaded to vote for higher rates, and I still think early 2016 is more likely.
“Thereafter the path of rate rises is likely to be a slow incline, and it wouldn’t surprise me to see them stuck on 0.75% for some time,” he says.