Surprise inflation jump could bring forward rate hikes

Yesterday's shock rise in core inflation could bring forward the date of the first Bank of England base rate hike, analysts say.

Although inflation as measured by the consumer prices index (CPI) was just 0.1% in July, core inflation surprised markets by jumping 50% to 1.2%.

Analysts say this is a sign of underlying inflationary pressure and could force the Bank's monetary policy committee (MPC) to act.

This follows comments on Monday by Kristin Forbes at the Bank suggesting that a rate hike could come sooner rather than later.

Joshua Mahony, market analyst at IG, said that higher core CPI showed why rates have to rise sooner rather than later

“It is only a matter of time before rates in both the UK and US will rise in anticipation of higher inflation.

“The rise in core inflation shows that when stripping out the impact of lower energy prices, the UK is on a clear upward trajectory which will both reassure and worry the Bank of England in equal measure.

“Monday’s comments from the Bank’s Kristin Forbes couldn’t have come at a better time, highlighting that there’s a two-year lag between interest rate changes and inflation, meaning rates will need to rise well before CPI goes anywhere near 2%.”

Richard de Meo, managing director at Foenix Partners, said: “Talk of interest rate hikes strongly suggests a willingness by the MPC to overlook headline CPI and focus on ‘real’ inflation, which strips out the impact of energy prices.

“This is best captured by the departing David Miles, a renowned dove, confirming that he was closest to being in favour of policy action in August than at any point during the preceding 71 meetings of his tenure.

“At the very least, today’s move into positive territory will see Martin Weale joining Ian Mcafferty in favour of a 0.25% increase at the next meeting.”

Ben Brettell, senior economist at Hargreaves Lansdown, said the rise in the core figure suggests that underlying inflationary pressures are building in the economy.

“This is possibly the clearest indication yet that the Bank of England might have to raise interest rates sooner rather than later.

“Currency markets seem to agree - sterling jumped around a cent against the dollar, and almost a cent against the euro immediately after the figures were released.”

Brettell said the latest figures will increase speculation over a rate rise later this year.

“Possible, but not probable is my view. It will take some time for more MPC members to be persuaded to vote for higher rates, and I still think early 2016 is more likely.”