Britain’s surprise jump in inflation

The annual rate of consumer price inflation (CPI) jumped to 1.9% in June, the highest level in five months, from 1.5% in May. That surprised analysts, most of whom were expecting a reading of 1.6%. The Bank of England’s target rate is 2%.

Meanwhile, the unemployment rate slid to 6.5% of the workforce, the lowest since December 2008. A year ago, it was 7.8%.

The employment rate, the proportion of those aged 16 to 64 in work, has climbed to a record of 73.1% in the three months to May.

However, average annual earnings growth slipped to just 0.7%, continuing the divergence between employment and pay seen in recent months. The pound rose to a six-year high against the dollar as a rise in interest rates looked more likely.

What the commentators said

Around half the rise in inflation was due to clothing prices, and this looks like a “temporary blip”, according to Capital Economics. Clothing prices normally fall between May or June, but this year they didn’t, apparently because the summer sales are set to start later than usual this year.

The 12% rise in trade-weighted sterling over the past year, which is still working its way through the system, and subdued producer price inflation, also suggest that inflation should fall back soon.

Yet, what if shops don’t cut prices, wondered Simon Smith of Fxpro.com. If they are discounting less and not as early as last year, that could mean they are enjoying more pricing power as the economy strengthens.

And the rise in inflation last month was broad based: of the 12 main categories that make up the CPI, only one showed falling prices.

“The case for higher interest rates is building,” said Markit’s Chris Williamson. There is no sign of the economy losing momentum, unemployment is “plummeting”, the housing market is booming and inflation is almost back to target.

In any case the Bank of England is supposed to be targeting inflation in two years’ time, not the current rate. It should hike rates in November. And “better that rates rise sooner”, added James Moore in The Independent, “and more gently over a long period, than increase sharply as a result of a panic if [this week’s inflation data do] signal something nasty”.

Merryn

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