UK Inflation Rises but Not Enough to Deter Rate Cut

UK inflation accelerated more than expected on higher air fares and petrol prices in June, up 0.5% on the previous year. Inflation has been below the government-set 2% target since January 2014.

Although the latest inflation data relates to pre-Brexit prices, the 9% drop in sterling post-vote could help push inflation above the Bank of England's target as early as the first quarter of 2017, James Smith at ING, said.

The upside for consumer price inflation will likely be limited by a number of factors, so it is unlikely to go much higher than 3%, IHS Global Insight Economist Howard Archer, said.

Archer noted that the rise in inflation to 0.5% in June is unlikely to deter the Bank of England from pressing ahead with monetary policy stimulus in August, given serious concerns and uncertainties about the economic situation and outlook.

Inflation trends after the Brexit will be seen in July CPI figures, which is to be released on August 16. The BoE is expected to cut its interest rate next month after assessing quarterly inflation and growth forecast.

The ONS report showed that rises in air fares, prices for motor fuels and a variety of recreational and cultural goods and services were the main contributors to the increase in the annual rate. Air fares were driven higher due to the Euro 2016 football tournament.

Core inflation that excludes energy, food, alcoholic beverages and tobacco, increased to 1.4% from 1.2% in May.

Month-on-month, consumer prices gained 0.2% in June, the same rate as seen in May and in line with expectations.

Another report released by the ONS showed that factory gate prices for goods produced by UK manufacturers continued to fall in June.

Output prices declined 0.4% from last year, but slower than prior month's 0.6% decrease. Prices were expected to drop 0.5%.

On a monthly basis, output prices moved up 0.2% for the second consecutive month in June.

Input prices logged a slower annual decrease of 0.5% after easing 4.4% in May. Economists had forecast a 0.8% fall for June.

On a monthly basis, input prices advanced 1.8% versus a 2.2% increase in May and the 1.1% growth forecast by economists.