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Inflation hits five year high of 3%

Inflation hits five year high of 3%

The consumer price index (CPI) hit 3% in September, a level not seen since May 2012, increasing expectations of a November interest rate rise.

The Office for National Statistics (ONS) said that the key drivers of the rise, up from 2.9% in August, were a combination of air fares, fuel, leisure and food costs either rising or falling less than the same month last year.

The cost of clothing had the largest downward effect, but this was insufficient to prevent the overall rate of inflation rising. Core inflation remained at 2.7%, but the headline rate was again 0.2 percentage points above the Monetary Policy Committee’s (MPC) Inflation Report prediction, as it was in August.

Many now expect the Bank of England to pull the trigger on a rate rise, although not all commentators necessarily agree with the move, with consensus suggesting inflation is now at or close to a peak.

‘Over the coming months, our expectation is that it will start to fall back to 2%, the level at which the Bank of England is mandated to maintain it,’ said Matthew Brittain, an investment analyst at Sanlam UK.

‘This view is not necessarily shared by the Bank of England, and today’s announcement makes an interest rate rise in November a near certainty as the Monetary Policy Committee takes action show they are keeping inflation under control.’

Samuel Tombs, chief UK economist at Pantheon, believes the MPC will only raise rates once in the next year though, with inflation set to peak. Although he predicts that British Gas’s price hikes, which will come into play next month, will add 0.05 percentage points to October’s inflation rate, this will be offset by retailers raising prices at a lower rate than last year, when they passed on higher sterling-related import prices faster than anticipated.

He also notes that inflation in the services sector has been weaker than the MPC expected.

‘Looking ahead, we still expect CPI inflation to peak at 3.1% in October, as more retailers raise prices in response to the surge in the cost of imported goods,’ Tombs said.

‘Inflation looks set to fall sharply in 2018, now that retailers have nearly completed sterling-related price rises. Domestically-generated inflation has remained muted; indeed, inflation in the services sector was just 2.7% in September, well below its 3.7% average in the decade before the recession.’

He added: ‘As such, we think that CPI inflation will return to the 2% target by late 2018 and likely will slip below 2% in 2019, discouraging the Committee from raising interest rates more than once over the next 12 months.’

However, Hargreaves Lansdown senior analyst Laith Khalaf says the MPC is likely to hold fire, having previously shying away from rate hikes despite hawkish noises from some of its members.

‘The tick upwards in inflation will increase expectations of a rate rise from the Bank of England later on this year, stoked by a flurry of hawkish rhetoric coming from Threadneedle Street,’ he said.

‘This wouldn’t be the first time the bank has talked the talk without walking the walk however, so it’s probably best not to count those chickens until they’re hatched.’ 

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