UK inflation: Pound hits seven-week high as inflation unexpectedly hits 0.1 per cent in July

 
Jessica Morris
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Inflation was expected to stick at zero (Source: Getty)

The pound hit a seven-week high against the greenback this morning as investors cheered a better-than-expected inflation figure.

Official data showed the consumer price index rose 0.1 per cent in the year to July, from zero a month earlier, beating economists' expectations for no change. Nevertheless inflation still remains well below the Bank of England's target of two per cent.

It was helped by a smaller fall in clothing prices on the month, compared with the same period a year earlier, as well as rising transport costs.

Read more: BoE: "No urgency to raise rates"

At the same time core inflation - which removes the more volatile sectors such as energy, food and tobacco - hit a five-month high, rising from 0.8 per cent to 1.2 per cent in July.

The retail prices index was unchanged at one per cent - and this figure will be used to calculate rail fare increases next year. The inclusion of housing costs, such as mortgage interest payments and council tax, is one way it differs from the consumer price index.

Inflation first slipped to zero in February. The BoE has recently scaled back its inflation forecasts, saying it'll stick close to zero for the next three months, before rising to just 0.5 per cent by the end of this year. Stagnant prices are one factor dragging on the increasing impetus among rate-setters to move towards a rate hike.

External monetary policy committee (MPC) member Kristin Forbes yesterday warned keeping interest rates low for too long risks undermining Britain's economic recovery.

“Waiting too long would risk undermining the recovery—especially if interest rates then need to be increased faster than the gradual path which we expect,” Forbes wrote in the Telegraph.

Read more: Former MPC member says rate rise would harm the UK

David Miles, who will leave the MPC this month having never vote for a rate rise, admitted there was a "reasonable case" for an August hike but he was dissuaded by contradictory price pressures in the economy.

“Sterling had gone up a bit, oil prices had fallen a bit, there were somewhat ambiguous signals from the labor market, but on balance it was a set of economic news that probably reduced at least the near-term inflation profile by a non-trivial amount,” he told Bloomberg News.

“For me that was what made the decision ultimately one to keep policy on hold.”

Governor Mark Carney has also warned "the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year". However he has since stressed that this is a personal view.

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