UK inflation leaps to 2.1 per cent in shock rise

Analysts say pound’s recent depreciation will help keep inflation above 2 per cent for most of next year

Inflation in Britain accelerated to 2.1 per cent in July, confounding forecasts for a slowdown.

Economists had expected annual inflation to drop to 1.9 per cent from 2 per cent in June. However, official data revealed an increase in consumer price inflation, driven by rises in the prices of computer games, toys, hotel rooms, clothing and shoes.

Analysts said inflation is likely to be supported in the coming months by the recent decline in the pound, sparked by fears of a no-deal Brexit, as well as strong pay growth. Wages rose at the fastest pace in 11 years between April and June compared with a year earlier, according to figures from the Office for National Statistics (ONS) released on Tuesday.

“The recent weakening in sterling will provide some upward pressure on prices as firms begin to feel the pinch of higher import costs,” said Tej Parikh, chief economist at the Institute of Directors.

Ruth Gregory, senior UK economist at Capital Economics, said she expects inflation to exceed the Bank of England’s 2 per cent target for most of next year, pointing also to UK factories’ rising costs.

But consumers are likely to get a respite before 2020, she added, chiming with others, as lower energy prices will push inflation back down below 2 per cent.

Inflation in fuel prices should abate further as oil prices have fallen, while energy regulator Ofgem is lowering the price caps on gas and electricity from October.

One wild card, though, is the outcome of Brexit in October.

“The outlook for inflation is strongly tied with the Brexit outcome, with a no deal likely to see further falls in the pound and a rise in inflation in the short term,” said ​Yael Selfin, chief economist at KPMG UK.

Another release from the ONS on Wednesday showed that UK house prices grew 0.9 per cent in the year to June, at the same rate as in May.

The worst performer was London, where prices fell 2.7 per cent. House prices in London have now been falling each month since March 2018.

Across the UK, the average house now costs £230,292, down from a peak of £232,000 in August 2018. In London, the average house costs £467,000.

“Stamp duty changes in 2016 and a slowdown in the buy-to-let market are likely to be putting downward pressure on prices,” said Jamie Durham, an economist at PwC. “Brexit uncertainty is also weighing on prices and is likely to continue to do so over the coming months.”

Additional reporting by Ben Chapman