World Economy

UK Inflation Rate Rises

UK Inflation Rate RisesUK Inflation Rate Rises

The UK inflation rate rose 0.5% in June, a higher rate than the 0.3% reported in May, indicating inflation is back on an upward trend towards the 2% target, said economists.

According to the Office for National Statistics the consumer price index rose by 0.5% in the year to June 2016, a little above the position seen for most of 2016, although still relatively low historically, InvestmentWeek reported.

Rises in air fares, prices for motor fuels and a variety of recreational and cultural goods and services were the main positive contributors to the increase.

These were partially offset by falls in the price of furniture and furnishings, and accommodation services.

The ONS said: “The (June) rate is the same as observed for March and slightly above the 0.3% recorded for all other months of 2016. The rates for 2016 to date are still relatively low but are above those generally experienced in 2015, which was a year of historically low inflation, with the rate being at or around zero for much of the year.” UK’s blue chips reacted negatively to the rise with the FTE 200 falling 0.4% to 6,666.7 points. Sterling also fell 0.4% against the US dollar to $1.319.

  Upward Trend

Ruth Miller, UK economist at Capital Economics commented: “June’s rise should be the start of an upward trend in UK inflation in the wake of sterling’s referendum-related slide.

“Looking ahead, the effect of low energy and food inflation—which accounts for about 80% of the difference between the headline inflation rate and the 2% target—should wane as last year’s sharp falls drop out of the annual comparison.

“This will be compounded by sterling’s slide of about 10% since the referendum, which looks set to boost the price level by a little less than 3% over the next three years. Accordingly, we think that CPI inflation should break through the 2% target in early 2017 and near 3% by the end of that year.”

However, Ben Brettell, senior economist at Hargreaves Lansdown, said the data is “past its sell-by date”: “By its nature most economic data is backward-looking. In a world of gradual change this does not matter—it is possible to infer the direction of travel by looking at what has just happened. However, seismic events such as the EU referendum can render such data irrelevant.

“Sterling’s weakness means higher import prices, and this is expected to feed through to significantly higher inflation figures in the coming months. Forecasts suggest it could reach 3-4%”.