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UK inflation unexpectedly rose to an 18-month high of 3.6 per cent in June, in a setback for the Bank of England as it seeks evidence that price pressures are cooling alongside slowing economic growth.
Wednesday’s figure from the Office for National Statistics exceeded the prediction of analysts polled by Reuters that inflation would remain at May’s level of 3.4 per cent.
The pick-up in inflation was driven by higher prices for petrol, airfares and rail tickets, the ONS said.
The BoE is deliberating whether to cut its key interest rate again as soon as August. In June, the Monetary Policy Committee voted six to three to keep rates unchanged at 4.25 per cent, following a quarter-point cut in May.
The MPC, which has an inflation target of 2 per cent, has reduced interest rates four times since last summer, but policymakers have been divided over how persistent price pressures will prove.
Core inflation, which excludes energy and food, was 3.7 per cent in June, up from 3.5 per cent in May, the ONS said. Services inflation, a key gauge of price pressures for the MPC, was unchanged from May’s 4.7 per cent, exceeding the 4.6 per cent predicted by economists.
Following the data, traders continued to bet on at least two more quarter-point cuts from the BoE this year, with the next move coming in August, according to levels implied by swaps markets.
The pound strengthened 0.2 per cent to $1.340 in early trading on Wednesday. The yield on two-year gilts, which are sensitive to changes in rate expectations, edged up 0.03 percentage points to 3.87 per cent.
“Is an August rate cut in jeopardy? No, we don’t think so,” said Sanjay Raja, chief UK economist at Deutsche Bank. “There’s enough of a slowdown in GDP and the labour market to warrant a ‘gradual and careful’ easing of monetary policy.”
The economy contracted in May for a second consecutive month, following a robust first quarter expansion, as businesses contend with tax increases and the uncertainty unleashed by US President Donald Trump’s trade war.
The MPC has signalled its concern at the increasing signs of weakness in the labour market.
Last month, Andrew Bailey, the BoE governor, warned more businesses were cutting hiring, hours and pay following the increase in employers’ national insurance contributions, which was announced in chancellor Rachel Reeves’ Autumn Budget and took effect in April.
The latest evidence of the pressure on UK households comes as Reeves attempts to kick-start growth.
Responding to the figures, Reeves said: “I know working people are still struggling with the cost of living.”
