UK inflation just misses three per cent forecast

The Office for National Statistics released a raft of statistics this morning indicating the health of the UK economy.

The UK’s measure of consumer price inflation rose by 2.9 per cent in the year to June 2013, just below analyst expectations of a 3.0 per cent rise. This is up from 2.7 per cent the month before and the biggest rise in 14 months. The largest upward pressures came from price jumps in motor fuels and clothing, with petrol prices up 1.0 pence to £1.34, and clothing and footwear prices up 0.15 per cent. Compared with May 2013, the consumer price index in June was flat.

This will mean that new Bank of England governor Mark Carney will not have to write a letter of explanation to the Treasury, as he must do if inflation rises above three per cent.

This is nontheless a worrying state of affairs, with inflation now three times underlying annual earnings growth of 0.9 per cent in the three months to April. A person investing £10,000 five years ago would now have a sum worth just £8,846.

Here's Markit's graph showing how real pay has been affected by inflation:

And Howard Archer, chief UK and European economist at IHS Global, doesn't think it's long before Carney will have to face up to the Treasury.

June is unlikely to mark the peak in inflation. We expect inflation to climb a little higher over the summer to peak around 3.1% and then to start coming down gradually from the fourth quarter. However, much will depend on oil prices which have recently firmed to trade at a three-month high of US$109/barrel after dipping below US$100/barrel at times in May and June.

Archer adds it is unlikely these figures will create a case for further quantitative easing, given recent good data, but he does expect a reaction of sorts.

However, while it is looks less likely that the Bank of England will loosen monetary policy further, we suspect that Mr. Carney and his MPC colleagues want to ram home the message that any tightening of monetary policy is a very long way off. To this end, we expect the Bank of England to formally adopt a policy of forward guidance on interest rates in August. We expect interest rates to stay at 0.50% until at least the second half of 2015.

The output price index for goods produced by UK manufacturers (producer price inflation, not seasonally adjusted), meanwhile, was up 2.0 per cent in the year to June (1.9 per cent rise expected). Core output (excluding volatile products like food, beverages, tobacco and petroleum) was up 1.0 per cent (1.1 per cent increase forecast).

In the same period, the overall price of materials and fuels bought by UK manufacturers for processing (PPI input prices) increased by 4.2 per cent, in line with expectations

Finally, retail prices rose by 3.3 per cent in the 12 months to June 2013, compared to expectations of a 3.4 per cent increase. Month-on-month, retail prices were down 0.1 per cent.