Britain's surprise jump in inflation

published 17 July 2014

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 proportionof those aged 16 to 64 in work, has climbed to a record of 73.1% in thethree months to May.

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However,average annual earnings growthslipped to just 0.7%, continuingthe divergence between employmentand 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

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 inThe Independent, "and more gentlyover a long period, than increasesharply as a result of a panic if [this week's inflation data do] signal something nasty".

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.