Tuesday, 15 July 2014 10:13
'Unexpected' inflation increase creates interest rate speculation
An 'unexpected' rise in inflation has been announced this morning- prompting speculation that a first interest rate rise in over five years could be close.
The Consumer Prices Index grew by 1.9% in the year to June 2014, up from 1.5% in May, according to The Office for National Statistics.
The largest contributions to the rise in the rate came from the clothing, food & non-alcoholic drinks and air transport sectors.
Ben Brettell, a Hargreaves Lansdown senior economist, said: "Today's unexpected rise will raise speculation that the first interest rate rise could be round the corner.
"However, it's important to look at the overall trend rather than one month's number in isolation, as the monthly figures can be volatile, influenced by one-off factors.
"For example, the largest contribution to this year-on-year increase came from clothing – usually prices fall in June as summer sales start, but this year it appears the good weather could have persuaded retailers not to cut prices.
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"While it looks likely that inflation will remain close to the 2% target in the medium term, should it continue to tick upwards in the coming months we could see members of the Monetary Policy Committee start to vote for higher interest rates."
He believes the wider economy might not be strong enough to withstand a rate rise.
He said: "The private sector remains highly indebted, and could struggle to service these debts were interest rates to rise.
"Productivity is also a major issue – our national economic output is now broadly the same as it was before the financial crisis, but employing around one million people more to produce that output.
"This is clear indication that slack in the labour market remains – I believe the Bank of England will want to see hard evidence that this spare capacity has been absorbed before considering higher interest rates.
"Tomorrow's labour market statistics could provide further clues."
The Consumer Prices Index grew by 1.9% in the year to June 2014, up from 1.5% in May, according to The Office for National Statistics.
The largest contributions to the rise in the rate came from the clothing, food & non-alcoholic drinks and air transport sectors.
Ben Brettell, a Hargreaves Lansdown senior economist, said: "Today's unexpected rise will raise speculation that the first interest rate rise could be round the corner.
"However, it's important to look at the overall trend rather than one month's number in isolation, as the monthly figures can be volatile, influenced by one-off factors.
"For example, the largest contribution to this year-on-year increase came from clothing – usually prices fall in June as summer sales start, but this year it appears the good weather could have persuaded retailers not to cut prices.
{desktop}{/desktop}{mobile}{/mobile}
"While it looks likely that inflation will remain close to the 2% target in the medium term, should it continue to tick upwards in the coming months we could see members of the Monetary Policy Committee start to vote for higher interest rates."
He believes the wider economy might not be strong enough to withstand a rate rise.
He said: "The private sector remains highly indebted, and could struggle to service these debts were interest rates to rise.
"Productivity is also a major issue – our national economic output is now broadly the same as it was before the financial crisis, but employing around one million people more to produce that output.
"This is clear indication that slack in the labour market remains – I believe the Bank of England will want to see hard evidence that this spare capacity has been absorbed before considering higher interest rates.
"Tomorrow's labour market statistics could provide further clues."
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