Although inflation as measured by the consumer prices index (CPI) was just 0.1% in July, core inflation surprised markets by jumping 50% to 1.2%.
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A poll of 475 readers by Mortgage Strategy shows that 36 per cent of the industry expects the Monetary Policy Committee to increase the benchmark rate in the second quarter of 2016.
The move was driven largely by a lower-than-expected fall in the contribution of clothing and footwear which added 0.14% to the figure, as stores cut prices by less than last year during the summer sales.
United Kingdom inflation has been near zero for most of this year and actually dipped into deflation territory back in April, although a large part of the decline can be attributed to the sharp fall in energy prices which is seen as being net positive for the economy.
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Writing in the Daily Telegraph, Kristin Forbes said the temptation to delay increasing the record-low 0.5 per cent rate was great at a time of zero inflation.
The pound remained supported close to seven-week highs against the dollar on Wednesday, bolstered by expectations that an increase in inflation will prompt the Bank of England to raise interest rates in the coming months.
‘Low inflation has meant the monetary policy committee (MPC) remain dovish on raising interest rates, but the tide could be turning in favour of an interest rate hike, ‘ she said.
Lord O’Neill, commercial secretary to the Treasury, said the inflation figure “shows the benefit of an economic plan that is working, with a strong combination of low prices and rising pay packets”.
“Interest rates will need to be increased well before inflation hits our 2 percent target”, Forbes said. The pound will be particularly vulnerable to a weak reading, because this will certainly push back the timing for a rate rise. “While households will have seen individual prices rise and fall, the overall shopping basket bought by the country remains little changed in price compared with a year ago”, said ONS head of CPI Richard Campbell.
You may find this shocking, but it is probable that the governor of the Bank of England hasn’t cried wolf about interest rates being likely to rise fairly early in the new year.
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Earlier this month, MPC members voted 8-1 to keep rates on hold – the first time for months the decision has not been unanimous – and this, together with the comments from Prof Miles and Prof Forbes, suggests that the balance is shifting.
