LONDON (AP) — A June shopping spree drove an unexpectedly big increase in U.K. inflation that has fueled expectations that the Bank of England may start raising interest rates soon, possibly by the end of this year.
Figures Tuesday from the Office for National Statistics showed consumer prices rose by an annual rate of 1.9 percent in June, just below the Bank's ostensible target of 2 percent. Inflation, which rose from May's 4 1/2-year low of 1.5 percent, is now at its highest level since January.
The consensus in the markets was for a far more modest increase of 1.6 percent. The forecast-busting figures gave the British pound a further boost helping it rise 0.4 percent to $1.7161 as traders priced in a swifter than anticipated interest rate increase.
The pound is not far off the $1.7180 level it hit earlier this month, which was its highest since the peak of the global financial crisis in October 2008.
Much of the increase in the June inflation rate was due to demand for clothing. Usually prices fall in the summer as retailers cut prices during the traditional sales season, but Ben Brettell, senior economist at Hargreaves Lansdown, said the warm weather may have led to them delaying or abandoning any reductions as consumers took to the malls.
With the U.K. economy growing faster than most other developed economies, the pressure is mounting on the Bank of England to start increasing interest rates, especially if inflationary pressures are starting to build. The bank's main interest rate has been at an all-time low of 0.5 percent since March 2009.
"The news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike," said Chris Williamson, chief economist at Markit.
Separate figures showing that house prices rose by a monthly rate of 0.8 percent in May also reinforced expectations that the central bank will have to raise borrowing costs to prevent another potentially destabilizing housing boom.
Brettell said the unexpected rise in inflation will raise speculation that the first interest rate rise "could be round the corner," but cautioned that it was important not to look at one month's figures in isolation.
More insights into the Bank of England's thinking will emerge in August when it publishes its quarterly economic projections and the first estimate of second-quarter economic growth on July 25. The consensus in the markets is that the U.K. economy, Europe's third-largest, grew by a quarterly rate of 0.8 percent during the three-month period, equivalent to an annualized rate of around 3.2 percent.
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