UK inflation based on the consumer price index (CPI) jumped to an annual rate of 4.4% in July from 4.2% in June, making this the 20th month CPI inflation has been above the Bank of England’s 2% target. The results will disappoint the majority of economists, who had a consensus estimate of 4.3% (Schroders 4.5%). Excluding energy, food, and alcoholic beverages, core prices inflation rose from the annual rate of 2.8% to 3.1%. Meanwhile, the alternative measure based on the retail price index (RPI) remained unchanged at 5%.
Within the details, this month’s upside surprise to consensus estimates reverses the downside surprise seen last month caused by the early start to the summer sales. In addition to the seasonal factor, housing and household services inflation is currently elevated as the cost of social housing and rents has risen faster than normal. Higher rents reflects the higher demand for rental properties as new households not only struggle to get a foothold on the property ladder, but may also be choosing not to commit to buying a property due to the uncertain economic environment.
The other major contributor to the annual inflation rate in July is cost of transport, as the higher price of oil feeds through to the cost of public transport. Commuters today will be disappointed to learn that rail fares are set to rise by as much as 13% from January (3% on top of the July RPI figure of 5%, plus an additional 5 % for some routes), which is bound to squeeze the disposable income of consumers.
Overall, this month’s numbers are not as important as next month’s numbers, which will include the first set of gas and electricity prices that have been announced over the summer. We expect the rise in energy prices to push up CPI inflation to close to 5% for August, and beyond that later in the year. Despite this, we expect the Bank of England to continue to disregard the rise in inflation and keep interest rates on hold until 2013. The Bank of England has set out its belief that weakness of the economy will bring inflation back to target over the medium term. We are not convinced.
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