UK inflation jumps to six month high, boosting pound

UK inflation jumped unexpectedly last month, according to official data released on Wednesday, triggering a jump in the pound to an eight-week high against the dollar.

The consumer price index for August was up 2.7% on last year, the Office for National Statistics revealed, up from the 2.5% rise in July, while the market had expected a fall to 2.4%. However CPI rose by a higher than expected 0.7% month-on-month.

Core CPI, which excludes prices such for food, fuel, alcohol and tobacco, rose to 2.1% on the year, up from 1.9% a month earlier and higher than the 1.8% forecast.

“Consumers paid more for theatre shows, sea fares and new season autumn clothing last month," said ONS head of inflation Mike Hardie. "However, mobile phone charges, and furniture and household goods had a downward effect on inflation."

CPIH, the ONS's preferred measure of inflation as it includes owner occupiers’ housing costs, rose to 2.4%, up from 2.3% a month before.

Producer prices inflation dropped to 8.7% from 10.3% and factory gate inflation to 2.9% from 3.1%, which would suggest underlying CPI is in line to soften in coming months.

Ben Brettell, senior economist at Hargreaves Lansdown said the rise in both goods and services, with company input prices up 8.7% on the year, was "a clear sign that inflationary pressure could be building in the domestic economy".

He said sterling's sharp gain came as traders adjusted their interest rate forecast, with the numbers reinforcing expectations that policymakers will gently lift interest rates over the next couple of years.

"The figures won’t come as welcome news to the Bank of England though – they’ll be desperate to leave policy unchanged until we get some clarity over Brexit, and won’t want to be forced into a rate rise by accelerating prices. A rise to 1% is tentatively priced in for around May next year, though clearly a disorderly Brexit would force a dramatic rethink," he said.

The unexpected rise in CPI was "a bit of a nasty surprise" said Capital Economics' Ruth Gregory, especially as it was driven by a pick-up in core CPI inflation that will "raise fears that underlying inflation pressures are on the up again".

But she noted that the increase in the core rate was driven by a sharp jump in the volatile theatre, airfare and clothing components which are likely to be temporary, with clothing inflation snapping back from a 3.7% fall in July to 3.1%, while the fall in producer and factory gate prices suggested the prospect of a fall in core CPI.

"Of course, utility and fuel price rises will probably hinder downward progress in inflation in the next few months. Nonetheless, the waning impact of sterling’s post-referendum fall should still bring inflation down in time."

Howard Archer of the EY Item Club agreed, as August's pickup was largely due to a stronger reading for the "volatile" recreation and culture sector, "and we expect this to prove to be noise".

He added: "A higher oil price, rising domestic energy bills and a weaker pound will mean that inflation remains sticky in the short-term. But we expect weak underlying pressures and base effects to exert downward pressure on inflation as we move into 2019."