Inflation ticks up to trigger rate rise talk

THE pound soared after a key measure of inflation hit its highest level for five months – fuelling expectations that interest rate rises are on the way.

Figures f rom the Office f or National Statistics showed a surprise tick up in inflation from zero in June to 0.1pc in July – still well below the 2pc target. But so-called ‘core’ inflation, which excludes energy, food, alcohol and tobacco, jumped from 0.8pc to 1.2pc – a level last seen in February.

analysts said the 50pc jump in core inflation – driven by the rising price of clothes and shoes – could be a sign that headline inflation will head back towards 2pc once the impact of falling oil and food prices fades. The report will raise eyebrows at the Bank of england where officials are split over when to raise interest rates.

Kristen Forbes, a member of the rate-setting monetary policy committee, this week said ‘ rates will need to be increased well before inflation hits our 2pc target’. She warned that waiting too long to raise rates ‘would risk undermining the recovery’ if it allowed inflation to take off.

Sterling jumped 1pc against the dollar to $1.5562 and 1.3pc against the euro to €1.4231 before easing.

Central banks traditionally raise interest rates to curb rising inflation. The prospect of higher rates tends to boost a currency as it attracts investors in search of better returns. Ben Brettell, senior economist at investment group Hargreaves lansdown, said: ‘The rise in the core figure suggests that underlying inflationary pressures could be building in the economy, and 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.’

John Hawks worth from accountant PwC said: ‘The pick-up in core inflation reinforces the case for interest rates to start rising sooner rather than later.’