UK: Inflation set to hit 14-month high

Mark Carney

Mark Carney - Credit: PA

Inflation figures are set to hit a 14-month high tomorrow after June saw a surge in prices at petrol pumps and on supermarket shelves.

Consumer Prices Index (CPI) inflation is expected to rise to around 3% from May’s 2.7% level, when rising air fares and more expensive clothing and footwear intensified the squeeze on consumers.

New Bank of England governor Mark Carney will have to write a letter to Chancellor George Osborne explaining why prices are rising so fast if the figure from the Office for National Statistics (ONS) exceeds 3%.

But inflation is expected to begin falling back later this year as commodity prices weaken and utility bill hikes ease.

The figures will show inflation continues to erode consumers’ spending power and savings and significantly outstrips wage rises, which increased by just 1.3% in the three months to April compared with a year earlier.

Inflation last hit 3% in April 2012 and has remained stuck above the Bank’s 2% target since December 2009.

Figures from the British Retail Consortium recently showed food price inflation rose to 2.7% in June from 2.4% in May, as seasonal price pressures bled through to higher shelf prices. However, prices of non-food items fell 1.9% in June from 1.5% a month earlier.

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Economists said the slumping value of sterling could also see more imported inflation, as the cost of buying goods from abroad rises on the pound’s weaker purchasing power. Sterling last week fell to a near three-year low against the dollar.

The expectation-busting rise in inflation in May was blamed in part on a 22% surge in air fares.

The price of clothing and footwear also rose 1.2% month on month in May, as the cost of women’s outdoor clothing increased during a colder-than-normal month. There were also price rises for furniture, carpets and garden tools.

The Bank of England has been given a looser remit on inflation by Mr Osborne, allowing it to tolerate extended periods of above-target price rises in favour of growth-boosting measures such as more quantitative easing (QE).

But the Bank held its (QE) programme steady at £375 billion earlier this month. Minutes published later this week will reveal whether Mr Carney followed his predecessor Sir Mervyn King in voting for more asset purchases.

Investec economists said they expect the Bank to resume QE in August, but added that upbeat economic news in recent months has “introduced an element of uncertainty” to this prediction.