The rate of consumer prices in Britain increased more than expected in June as prices of food, clothing and footwear contributed to the upward pressure.
Both overall consumer prices and core prices posted growth in June as the annual Consumer Price Index (CPI) unexpectedly approached the official target of 2%. A rising rate of inflation may again pump up the pressure on the Bank of England’s (BoE) monetary policy decision.
The annual rate of CPI jumped to 1.9% in June, up from 1.5% in May and against expectations of a rise to 1.6%, according to fresh data from the Office for National Statistics (ONS).
Sterling consequently rocketed given the suggestion the BoE may again revise its rate hike closer to the end of this year.
Even with the CPI suddenly rising to 1.9% in June, the overall average index for the whole of the second quarter remained at 1.7%, which exactly matches the latest inflation outlook shown in the BoE's June Monetary Policy Committee (MPC) minutes.
In terms of the pressure on the overall CPI, the largest upward contribution came from increased prices of food and clothing and footwear when compared with the same month a year ago.
The ONS said that despite the prices of food remaining flat in June, the month-on-month rate rose in June by 0.1% against a sharp drop of 0.5% in June last year, which eventually increased an upward pressure on the annual change in CPI. Still, the price of food rose in June this year from a relatively low base, the ONS added.
This in some way contrasts with what the British Retail Consortium (BRC) reported in June, saying prices of food posted the lowest rate of inflation ever recorded by the group. The BRC report also showed that overall shop prices had continued to remain in deflationary territory in June and recorded the largest dip since records began in December 2006.
With core inflation, which excludes volatile prices of energy, food, alcohol and tobacco, the price index also rose to 2% in June, up from 1.6% in May and more than the market's central estimate of 1.7%.
Whether the June CPI jump was a one-off event is uncertain, but the BoE's latest central estimate showed that CPI should remain below the 2% target for the next two years, tamed partly by a stronger GBP/USD.
"The appreciation of sterling over the past year or so meant that import prices were probably starting to pull down CPI inflation. Companies seeking to rebuild margins might do so by maintaining prices as their imported costs fell. It was possible, however, that the weakness in inflation elsewhere, especially the euro area, contained information about underlying global inflationary pressures that might yet become evident in the United Kingdom," the June MPC minutes said.
London house prices post record rise
In a separate data release, the ONS said prices of properties rose at the rate of 10.5% over the year to April, the highest rise since May 2010, while house prices in London posted an increase of 20.1%, the highest rate since 2002, when the ONS data began.
Prices rose in all regions of the UK except Northern Ireland, where prices fell 0.7%. In England, prices jumped 11%, in Wales they rose 6.5% and in Scotland property prices grew 3.6%.
Cap on risky mortgages
In order to create an insurance against a prolonged surge in house prices, the BoE recently introduced a new cap on riskier mortgages.
In its latest Financial Stability Report, the central bank urged lenders not to let the number of mortgages issued with loans of 4.5 times the borrower's income or greater, rise to more than 15% of the total number of new mortgages. The cap is expected to kick in to a greater degree and much sooner in London, where prices have soared by nearly 20% on an annual basis and the number of high loan-to-income mortgages is twice as big as the national average.
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