UK inflation is up, but there are reasons to think it may soon come tumbling down.
UK inflation hit 2.9 per cent in August, the joint highest level since April 2012. More worrying, core inflation, which excludes oil, food and tobacco, and is thus a less volatile reading, also rose, from 2.4 to 2.7 per cent.
It is bad news for households, we won't have the data on wages in August for several weeks, but it seems likely that real wages fell sharply in the month.
But there is a view that inflation is close to peaking.
Paul Hollingsworth, UK Economist at Capital Economics said: "We don’t think that the rise in CPI inflation has much further to run. Indeed, we expect it to peak at just above 3 per cent in October, before dropping back next year as the impact of the pound’s fall starts to fade."
In this respect, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics agreed, saying that "domestically-generated inflation remained weak in August. Inflation in the services sector only edged up to 2.7 per cent, from 2.6 per cent in July, remaining well below its 3.5 per cent average of the previous two decades. What’s more, this rise merely reflected a jump in the contribution from accommodation services, due to an unusually large fall in hotel prices a year ago."
But Mihir Kapadia – CEO and Founder of Sun Global Investments, partly blamed Brexit negotiations, saying: "The weak pound at least against the Euro, weighed down by its own problems from the hazy Brexit negotiations, is causing inflationary pressures by driving up the costs of imports. In the near term, the pound is expected to add further pressure, as the Euro is threatening to reach parity with the sterling, as investors await the ECB’s decision on stimulus in October. "
As for interest rates, and what the MPC, the Bank of England's rate setting committee will do, Paresh Davdra, CEO and Co-Founder of RationalFX suggested that "the next few days will be key for the currency as investors anticipate the possibility another split within the BoE which could strengthen the case for a rate rise. However it still remains to be seen if the dovish majority at the BoE can be persuaded that the latest rise in inflation necessitates a more hawkish policy.”
While Paul Hollingsworth added: "With mixed signals on the strength of the economy, and the majority of the MPC appearing to be comfortable with a temporary, exchange-rate driven pick-up in headline inflation, we don’t think that the MPC will be panicked into raising rates imminently. But the first hike is still likely to come before markets expect."
Mr Tombs seems to disagree saying: "We still think, however, that the chances of a rate rise this year are remote; domestically-generated inflation is subdued, inflation expectations have remained well-anchored and GDP growth is too weak to warrant higher rates."