UK inflation rate rises in July, ONS says

Phil Gooding, ONS: "An upward pressure came from air transport, second hand cars, clothing and footwear"

Prices in the UK were 2.6% higher in July than a year earlier, official figures have shown.

The annual inflation rate as measured by the Consumer Prices Index had stood at 2.4% in June, the Office for National Statistics said.

The unexpectedly large rise in the latest rate of inflation was due to higher air fares and housing costs.

A lower monthly drop in clothing prices, due to earlier summer sales, also helped boost the headline figure.

Retailers began their discounting in June - earlier than usual - because of the unseasonably wet weather, meaning clothing prices were not as low as usual in July.

It was the first time since March that the CPI figure had risen. That surprised analysts, who had expected prices to be rising at a slower rate.

'Disappointing'

Start Quote

This is another inflation-busting increase. There is only so much you can squeeze passengers”

End Quote Mike Hewitson, Passenger Focus

Meanwhile the Retail Prices Index, which includes housing costs and is calculated differently to CPI, rose to 3.2% from 2.8% in June.

This was bad news for commuters in England and Scotland as next year's rail fares are pegged to the July RPI figure.

Some English fares will rise by 6.2% - which is calculated as RPI plus 3% - about double the rate of inflation. In Scotland, they will go up by RPI plus 1%, while Wales has yet to set a figure for its increase.

The biggest factor in the increase in CPI was air fare prices, which rose 21.7% on the month, as flights to European destinations increased, said the ONS.

Another significant factor was the purchase of second-hand cars, but the rise was partially offset by falling fuel prices.

A slight increase in rents also helped push the overall index higher, followed by alcohol and tobacco, food, restaurants and leisure, official data showed.

Analysis

A sharp increase in air fares was a large factor in this surprise rise in the rate of inflation, another was that shops brought forward sales earlier in the year.

That depressed prices for things like clothes and footwear a few months ago, giving the impression that inflation was on a firm downward path.

But it is rising again now which will be a grave disappointment to the Bank of England and the government and a real blow to many rail users.

That's because this is tenth year in a row that train fares will rise by more than inflation. From January, ticket prices in England will rise by a total of 6.2% when many people are seeing their wages squeezed by the continuing recession.

That factor is also of wider concern, as it had been hoped that as the inflation rate fell towards the level that wages are increasing, the squeeze on consumers' spending power would reduce, helping them to spend more and so boost economic growth. But higher inflation now means that is less likely to happen.

The smallest monthly fall in clothing and shoe prices in recent years lay behind the higher CPI figure, as stores brought their summer sales forward to June following the rainy weather.

The CPI inflation rate has fallen from a peak of 5.2% in September mainly driven by a drop in fuel prices due to a weak global economy.

"Any increase is disappointing," said a Treasury spokesperson.

"The government knows how tough things are for families at the moment and that is why we have reduced income tax, and frozen both council tax and fuel duty."

Shadow chief secretary to the Treasury, Rachel Reeves, said: "People on low and middle incomes are paying a heavy price for failed economic policies which have pushed us into a double-dip recession including a VAT increase which has hiked prices and squeezed family budgets.

"That's why we urgently need a change of course and a plan for jobs and growth to get our economy moving again."

'Downward trend'

Analysts say the surprise uptick in July's inflation rate should not prevent the Bank of England from implementing further stimulus measures in the coming months, even though they can be inflationary.

Details from inflation calculator

The Bank slashed its growth forecast for the year last week to zero, but left open the door to a further interest rate cut in November.

"The outcome is higher than expected, but in our view, it should not be considered as the harbinger of rising underlying pressures," said Annalisa Piazza of Newedge Strategy.

"Today's inflation report is not expected to be an obstacle for further policy action in the coming months, as CPI is still expected to remain [close to] the 2% target in the medium term."

David Kern, chief economist at the British Chambers of Commerce, said he expected inflation to fall to about 2% by the end of the year, relieving the squeeze on businesses and household consumption.

However, he warned of continuing upward pressures on inflation because of the recent surge in world food prices.

The July figures "show that there is no room for complacency", he said.

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