Pound hits one-year high as UK inflation rises to 2.9%

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Record-breaking increases in clothing prices lifted UK inflation to a joint five-year high in August, according to data published on Tuesday by the Office for National Statistics. Consumer prices were 2.9 per cent higher in August than in the same month the previous year, compared with the 2.6 per cent year-on-year increase recorded in July.

The faster-than-expected rise in consumer prices brought inflation back in line with the five-year high first recorded in May. Clothing and footwear prices were 4.6 per cent higher than last year during the month — the steepest annual rate of increase since the ONS began tracking the sector in 2006.

The sharp increase in clothes prices was accompanied by increasing petrol prices, small increases in the cost of package holidays and higher prices for hotel rooms, which were all partly offset by a slight fall in air fares and food prices. Costs for clothes manufacturers track the foreign exchange rate, the ONS said in a commentary piece published alongside the figures.

“The increase in clothing price inflation may be partly associated with a lagged response to the depreciation of sterling during 2016 as supply contracts with overseas producers may now be renewed on different terms,” the ONS said.

In Asian trading on Wednesday, the pound continued to strengthen against the dollar, reaching $1.3310 after rising 0.9 per cent on Tuesday following publication of the inflation figures, and remains at its highest level since September 2016. Sterling also rose further against the euro to £0.9004 on Wednesday in Asia.

The Bank of England’s Monetary Policy Committee will meet this week to decide whether or not to raise interest rates. The BoE will publish its decision and the minutes of this week’s meeting on Thursday. The central bank must write a letter to the UK government if CPI inflation increases by more than 3 per cent.

At the MPC’s August meeting, Michael Saunders and Ian McCafferty voted to increase interest rates, while the other six members of the committee voted to leave rates unchanged. The committee is unlikely to vote to raise rates this week, but the central bank is expected to step up warnings that households and investors are underestimating how soon interest rates could rise.

The BoE has said that the UK economy can no longer grow at the same rate it did before the 2008 financial crisis, so a small increase in economic activity could lead to more inflationary pressure. However, the figures published on Tuesday show that the significant increase in inflation in the past year has come from imported goods, rather than increases in the price of domestic services.

“It is pretty remarkable that, with inflation near 3 per cent and unemployment at the lowest level in over 40 years, we are not seeing much wage inflation,” said Ian Stewart, chief economist at Deloitte. “That means a further squeeze on consumers, but it also means higher inflation is not feeding back into the economy in the form of wage growth,” he said.

The retail price index, which is used as a measure of inflation for train fares, student loans and some forms of government debt, increased to 3.9 per cent in August, from 3.6 per cent in July.