U.K. Inflation Rate Rises to Above Forecast 0.5% in June

Price growth picks up from 0.3% in May, amid expectations the weaker pound could push inflation far higher still.
By Laura Board ,

U.K. inflation rose more than forecast in June to 0.5% from 0.3% amid expectations a weaker pound could spur further price growth.

The period fell largely before the June 23 Brexit vote, and a steep decline in the value of the pound triggered by news of the "leave" victory the following day. Price growth remains well below the Bank of England's 2% inflation target, however, even though the 0.5% inflation rate beat forecasts for 0.4% growth. In May the annual inflation rate was unchanged from April at 0.3%.

"June's rise should be the start of an upward trend in U.K. inflation in the wake of sterling's referendum-related slide. Give it a year, and above-target inflation should be back on the cards again," noted Capital Economics' Ruth Miller.

She predicts inflation could break through the Bank of England's 2% target in early 2017 and rise to almost 3% by the end of that year. But Miller also said the Bank of England will probably "look through it and focus instead on cushioning the impact of the leave vote on the economy" when it sets rates.

The Office for National Statistics said June price growth was led by higher air fares, partly as a result of higher demand during Europe's soccer tournament in France, prices for motor fuels, and a steeper cost of recreational and cultural goods and services. Decliners included furniture and furnishings and accommodation services.

So-called core inflation, as measured by the ONS, ticked up to 1.4%, as against expectations for a stable rate of 1.2%.

The Bank of England last week unexpectedly left its benchmark rate unchanged at 0.5%, defying expectations for a post-Brexit cut to spur growth, but it signaled easing would come next month.

Outgoing Monetary Policy Committee member Martin Weale yesterday caused the pound to rise by making hawkish commentary on the need for stimuli, suggesting consumers and businesses weren't panicking in the same way as during the 2008 to 2009 credit crisis.

The FTSE 100 remained down after the inflation figures, and was recently 0.37% lower at 6,670.42. The pound recently extended a decline against the dollar, falling 0.46% to 1.3194

The figures included narrower retail price data, which showed higher-than-expected year-on-year growth of 1.6% . Growth picked up from May, where retail sales were up 1.4% on the year.

Producer price figures released at the same times by the ONS showed a smaller-than-expected 0.4% annual decline in June output, or factory gate prices, compared with a 0.6% decline in May. Input prices, or prices paid by producers, fell 0.5% on the year, with the decline narrowing dramatically from 4.4% in May.

Separate May house price data from the ONS showed an unchanged growth rate of 8.1% on the year before from the April figure.

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