London: UK inflation surged more than expected to the strongest pace in more than nine years, prompting investors to anticipate a sharper increase in interest rates next year.
Consumer prices jumped 3.2 per cent in August from a year ago, the most since March 2012, after dipping back to the central bank’s 2 per cent target the month before, the Office for National Statistics said on Wednesday. The reading was above the highest estimate in a Bloomberg survey.
The pound gained 0.1 per cent against the dollar to $1.3822, and money markets are now betting the Bank of England will raise the base rate to 0.5 per cent by the end of next year.
The figures “will keep the Bank of England in a hawkish mood, laying the ground for a rate hike in the first half of next year,” said Dean Turner, economist at UBS Global Wealth Management. “In light of this, the prospects for the pound remain bright.”
Temporary spike?
The ONS said that much of the increase is likely to be temporary. The strongest upward pressure came from prices charged by hotels and restaurants. That was heavily skewed by figures from last year when the government’s Eat Out to Help Out program led to large discounts across the sector.
More enduring signs of inflation both in the cost of transport and those shouldered by manufacturers point to higher prices for raw materials and labor. That’s threating to overheat an economy that the BOE is stoking with 150 billion pounds ($208 billion) of asset purchases by the end of this year.
The central bank has forecast that inflation will reach 4 per cent by the end of this year, double its target, and then fall back in both 2022 and 2023. Investors are starting to anticipate that policy makers may have to boost interest rates as early as next year to keep the economy from overheating.
The increase in inflation between July and August was the biggest since the current series of data started in 1997. There were more enduring signs of inflation that may not slip away so quickly.
The cost of used cars and fuels made a big contribution to higher transport costs. Housing and household services also rose sharply, reflecting higher rent costs.
Rising costs
There was further evidence of cost pressures building beyond the consumer level, with the fastest increases since 2011 for producer output and input prices.
The cost of raw materials entering factories surged 11 per cent from a year ago in August, more that the 10.4 per cent pace of the previous month, which was revised higher. The price of goods leaving leaving factories and utilities rose 5.9 per cent Both figures were more than economists had anticipated.
The retail price index, used in pay settlements and for the Treasury’s inflation-linked bonds, rose 4.8 per cent from a year ago last month, a full percentage point higher than in July.
