U.K. inflation accelerated more than economists forecast to its fastest pace since January, fueling speculation the Bank of England could raise interest rates within months.
Consumer prices rose 1.9 percent in June from a year earlier, up from 1.5 percent in May, the Office for National Statistics said today in London. The median forecast of 35 economists in a Bloomberg News survey was 1.6 percent. Upward pressure came mainly from clothing, food and air travel.
The pound and government bond yields jumped after the figures as traders added to bets the Bank of England could take the first step toward exiting emergency stimulus by the end of 2014. With the economy on course for its best year since 2007, divisions on the nine-member Monetary Policy Committee are expected to emerge as early as next month, economists say.
“If we see inflation at this level or edging up over the next couple of months then that might be a green light to the hawks at the BOE to start voting for a rate increase,” said Philip Shaw, chief economist at Investec Securities Ltd. in London. “This one month in itself won’t generate a response.”
A Bloomberg survey of economists published yesterday showed one in three expect the BOE to raise the key rate from 0.5 percent this year, up from 12 percent in a poll in early June. Speaking to lawmakers today, BOE Governor Mark Carney said decisions on rates will continue to be “data driven.”
The pound was trading at $1.7136 as of 11:00 a.m. in London, up 0.3 percent on the day. The implied yield on short-sterling contracts expiring in December rose 4 basis points to 0.86 percent. Two-year gilt yields gained 4 basis points to 0.87 percent.
Sonia forwards are fully pricing in a quarter-point rate increase by February. Three years of unanimous votes to keep the key rate at 0.5 percent may splinter next month as least one policy maker calls for a rise in borrowing costs, according to economist at banks from Deutsche Bank AG to Goldman Sachs Group Inc.
Consumer prices rose 0.2 percent from May compared with a 0.2 percent drop a year earlier. Clothing and footwear prices rose 0.6 percent, food and non-alcoholic drinks gained 0.1 percent and transport costs gained 0.6 percent.
Retail-price inflation, a measure used as a basis for the inflation-linked bond market and wage negotiations, accelerated to 2.6 percent from 2.4 percent. Core CPI quickened to 2 percent from 1.6 percent.
The figures add to the challenge facing policy makers as they try to gauge how much room the economy has to grow without driving up inflation.
Wage pressures remain subdued and inflation is in the midst of its longest stretch at or below the 2 percent target since 2005, with an appreciating pound and supermarket price wars expected to exert downward pressure on prices. Moreover, the drivers of the pickup in inflation last month may prove temporary, according to Rob Wood, an economist at Berenberg Bank in London.
Factory-input costs fell 0.8 percent on the month in June and declined 4.4 percent on the year, the ONS said in a separate report. Output prices fell 0.2 percent and gained 0.2 percent from a year earlier, the smallest annual increase since 2009.
Against that, consumer spending buoyed by a surging housing market and rising business investment are forecast to see the U.K. grow faster than any other Group of Seven country this year.
House-price inflation quickened to 10.5 percent in May, the most since May 2010, the ONS said in a separate report. In London, property values surged 20.1 percent, the biggest increase since records began in 2002, to 492,000 pounds ($843,000) -- almost double the national average. Excluding London and southeast England, house prices rose 6.4 percent, the largest gain since 2010.