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Will shock UK inflation rise push Carney to increase base rate?

UK inflation “defied expectations” in the year to July by rising from 0 per cent to 0.1 per cent, fuelling expectations of an interest rate increase in early 2016.

Data published by the Office for National Statistics this morning confirms prices increased by 0.1 per cent in the 12 months to July.

The largest upward contribution “by far” was made by clothing and footwear, where prices dropped by 3.4 per cent between June and July this year, compared to a 5.7 per cent fall in the same period a year ago.

Transport services, recreation and culture, and miscellaneous goods and services also made positive contributions during the period.

Food and non-alcoholic beverages, fuels and lubricants, and restaurants and hotels, meanwhile, all placed downward pressure on the headline inflation rate.

The “core” CPI inflation measure, which excludes goods with volatile prices such as energy, increased from 0.8 per cent to 1.2 per cent during the period.

Hargreaves Lansdown senior economist Ben Brettell says: “The rise in the core figure suggests that underlying inflationary pressures could be building in the economy, and is possibly the clearest indication yet that the Bank of England might have to raise interest rates sooner rather than later.”

Lloyds Bank head of economic research and market strategy Adam Chester says the “surprise” core inflation rise “has led to a knee-jerk spike higher in the pound and reaffirmed market expectations that UK interest rates could rise in the first half of 2016″.

Schroders senior European economist Azad Zangana says the latest CPI figures “show signs of a healthy economy that is enjoying the dividends from lower global commodity prices”.

He adds: “The Bank of England has started to question how long interest rates can remain at current record-low levels, but in our view, is unlikely to hike rates before CPI inflation returns to at least 1 per cent, which may not happen before the second quarter of 2016.”



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