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

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UK inflation “defied expectations” in the year to July by rising from 0 per cent to 0.1 per cent, fuelling speculation 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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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Sorry, 0.1% does not qualify as a “shock” rise in inflation. A blip yes but hardly a shock. What is the obsession with raising interest rates in this country, indeed I actually believe we could actually do with a bit of inflation so leave them alone!

  2. Middle England simply can’t take an increase in mortgage rates. It would be an immediate fiscal penalty akin to 25% VAT. That is the reason we are where we are, and we, like the Japanese, may stay for sometime yet.

  3. Agree with Tony, a 0.1 movement in the annual rate of inflation is hardly earth shattering and looking forward there are still likely to be downward pressures in the next few months as even lower fuel/energy prices filter through.
    I certainly agree with the second part of JDS’s comments about being on low interest rates, like the Japanese have been for so many years.
    Have to say though that borrowers should have factored in higher rates when they took out loans for house purchase as clearly these rates will rise, at some point!

  4. That’s why interest rates need to rise and crash the property market, so young people can get back on track quicker (with a bias towards the younger generation rather than 2nd property owners and give them the same opportunity as that of the current greedier sections of the older generation. Stop lying to yourself, we are not progressing, we are just passing on a larger debt to a future generation. We also need to look at things differently and invest in more social housing for the people that are striving hard or making great strides against all odds, that deserve that opportunity. Certain sections of the current older generation will not be looked on well when we look back at this current time.

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