United Kingdom: Inflation increases unexpectedly in August

Consumer prices rose 0.7% in August over the previous month, up from July’s flat reading. August’s figure was underpinned by higher prices for transport; clothing and footwear; and furniture, household equipment and maintenance.

Inflation in August increased to a six-month high of 2.7% from 2.5% in July, moving further above the Bank of England’s (BoE) 2.0% target and markedly overshooting analysts’ expectations of a decline to 2.4%. Core inflation—which excludes food and energy costs—also increased. The rise in headline inflation came on the back of a recovery in clothing and footwear prices and a faster year-on-year increase in transport costs compared to July.

Looking ahead, despite the upward surprise in August, the general trend for inflation is still likely to be downward going forward, as external factors which have generated price pressures in recent months—such as higher fuel prices and sterling weakness—fade. However, rising domestic cost pressures due to limited economic slack will likely slow inflation’s return to the BoE’s target.

UK Inflation Forecast

According to the August Inflation Report, the Bank of England sees inflation dipping to 2.3% in Q4 2018 and 2.2% in Q4 2019. FocusEconomics Consensus Forecast panelists expect inflation to average 2.5% in 2018 and 2.1% in 2019.