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Inflation reaches highest rate since late 2014

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Rising prices for fuel, alcohol, restaurants and hotels saw the Consumer Prices Index rise to 0.6 per cent in July – its highest rate in almost two years – in the first full month results following the UK’s vote to leave the EU.

The largest downward pull was from food and non-alcoholic drinks. Upward pressures were also partly offset by clothing and footwear and furniture and household goods, as well as falls in social housing rent and falling prices for some games and toys.

The rise is the highest since November 2014, but the Office for National Statistics says it is still relatively low in a historic context. Inflation is expected to rise over the next 18 months as weak sterling increases the cost of imports.

The ONS pointed out that the value of sterling in the effective exchange rate fell 7.3 per cent between August 2015 and the day of the Brexit referendum on 23 June. It fell a further 9.5 per cent between then and the end of July.

Hargreaves Lansdown senior economist Ben Brettell says the full effects of currency weakness will come through when existing inventories are wound down and currency hedges lapse, which he suggests will happen over the next couple of months.

AJ Bell investment director Russ Mould says the ONS statistics suggest times are tough for retailers, especially those with weak online sales but a heavy high-street presence.

“Meanwhile the biggest increases came from restaurants and hotels, as if to confirm comments made by Next that consumers are spending less on clothes and more on experiences such as dining out and other leisure activities,” Mould says.

“Other areas to show modest price increases were alcohol and tobacco, reaffirming the pricing power afforded by the brands owned by firms such as Diageo, Imperial Tobacco and British American Tobacco, education and also telecommunications, something which may intrigue shareholders in BT, Sky, TalkTalk and Vodafone.”

IHS Markit anticipates CPI hitting 1.5 per cent before the end of the year and reaching a peak of 3 per cent in late-2017 driven by sterling weakness.

Its chief UK and European economist Howard Archer says a combination of increasing inflation and stalling wage growth will put pressure on consumer spending power.

Archer says companies will try to save money on staff costs due to the rising costs of imports and that a softening in the labour market will dilute workers’ ability to seek rises in pay.

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