UK inflation was the big surprise this morning as the reading jumped to 2.9% for August, above and beyond the expectations of traders and analysts. This matched May’s reading, the highest reading for inflation in the UK since June 2013. The reading continues to provide support that the fallout from the referendum result last year is still being felt by consumers, this has been supported by wage growth on rising at 2.1% currently. The main reason for the spike in inflation for August was put down to a rise in clothing costs, particularly woman’s clothing and air fare prices also being pushed up. No doubt evidence that us Brits like going on holiday and the firms are keen to capitalize on this.
What does this mean for the Bank of England Interest rate decision on Thursday?
As the news surrounding higher than expected inflation was announced, the value of Pound immediately spiked against most major currencies. The Pound hit 1.11 versus the Euro, a level which hasn’t been seen since the beginning of August and before the news that the Bank of England wouldn’t be in a position to look at raising interest rates until 2019.
The news that inflation is still on the rise in the UK means that the Bank may have to raise interest rates sooner than previously thought and this has triggered investors to flock into the Pound. The Bank of England are due to meet Thursday, and although a 7 – 2 ‘no change’ vote is likely, a perfect storm is brewing.
Unemployment in the UK remains lower than early 2016 and inflation continues to rise, putting the squeeze on consumer wallets. I would expect a firework display on Thursday when Bank of England Governor Mark Carney is interrogated for clues as to further Monetary Policy guidance.