The Bank of England is set to come under pressure to control price growth after inflation in July came in at 2.1%, significantly above analyst expectations.
The figure, released by the Office for National Statistics (ONS) on Wednesday, follows bumper wage growth data earlier this week.
Analysts had predicted that the consumer price index, the measure of inflation used by the Bank of England and the government, would fall to 1.9%, or slightly below the Bank of England’s 2% target.
But the 2.1% growth in prices now suggests that record-low unemployment and high wage growth have now translated into higher consumer spending.
The ONS said on Tuesday that average weekly wages jumped by 3.7% in the year to June, the highest increase in more than a decade.
The Bank of England earlier this month forecast that inflation would fall below 1.6% in the final three months of the year, in part because of lower energy prices.
But the steep decline in the value of the pound in recent weeks has increased inflationary pressure in the UK, largely because it has raised the cost of imports.
The ONS said that higher prices for hotels, video games, and consoles combined with a decline in summer clothing discounts were responsible for the uptick in inflation.
Inflation in June had already hit the bank’s target.
Though markets expect the Bank of England to hold rates steady before the 31 October Brexit deadline, above-target inflation would normally prompt the bank to hike interest rates.
“The latest data will not change the position of the Bank of England, which is committed to keeping interest rates on hold at least until more clarity is provided on Brexit,” said Mike Jakeman, an economist at PwC, in a note on Wednesday.
The data, however, “could well be seen as supporting a hike,” said David Cheetham, chief market analyst at XTB.
Core inflation, which excludes energy, fuel, alcohol, and tobacco prices, also came in above expectations, climbing to a six-month high of 1.9%.
Another measure of inflation, the retail prices index, fell to 2.8%, from 2.9% in June.
That figure is used to determine the extent to which rail prices will be increased from January, meaning that commuters will face a £100 hike in season ticket costs.
Inflation has climbed since the June 2016 Brexit referendum, which prompted a 10% fall in the currency’s value.
The pound had its worst month since October 2016 in July, and earlier this month plunged below $1.21 (GBPUSD=X) for the first time since January 2017.
In normal times, surging inflation would see the bank tighten monetary policy, mostly by increasing its benchmark interest rate.
But the bank is expected to ease its policy stance — in part by lowering rates — in the event of a no-deal Brexit, because the economy will likely need a boost.
Under current guidance from the bank, which assumes that there will be an orderly exit from the European Union in October, the bank has said that it expects to gradually increase interest rates.
By Edmund Heaphy
Source: Yahoo Finance UK