UK inflation dents real incomes as it hits five-year high

BRITISH inflation hit its joint highest level in more than five years in August, complicating the Bank of England’s job this week of explaining why it is not raising interest rates.

The fall in the value of the pound since last year’s vote to leave the European Union helped drive the biggest rise in clothing prices since the consumer price index was launched in 1997 and rising global oil costs also had an impact.

Consumer prices overall increased by 2.9pc compared with a year earlier, the Office for National Statistics said, up from 2.6pc in July and above the median forecast in a Reuters poll of economists for a rise of 2.8pc.

That took the CPI back to its level in May. The last time it was higher than 2.9pc was in April 2012.

Sterling hit a one-year high against the dollar after the data and it rose strongly against the euro too as investors priced in a greater chance of the BoE raising rates for the first time in a decade. British government bond prices fell.

Sam Hill, an economist with RBC Capital Markets, said the BoE had been expecting inflation of 2.7pc in August and while no change in rates was likely this week, the inflation reading was a challenge for the central bank.

Most members of its Monetary Policy Committee are worried that uncertainty about Brexit will hurt the economy, which slowed sharply in the first half of 2017, and they have so far held off on voting for raising rates.

UK households have lost spending power as their wages are left behind by inflation. Figures due today are expected to show pay grew by an annual 2.3pc in the three months to July, picking up a touch but lagging inflation. (Reuters)