U.K. headline inflation rate rises to highest in over two years in September

The headline consumer price index inflation of the U.K. rose to the highest rate in over two years in September 2016. The CPI inflation came in at 1 percent year-on-year in the month, according to the Office for National Statistics. CPI inflation in August was 0.6 percent year-on-year. This is the highest 12-month rate since November 2014, when consumer prices rose 1 percent. Consensus projections were for a rise of 0.9 percent.

According to ONS, restaurant and hotel bills mainly provided the upward pressures to the headline inflation. Clothing and motor fuel have also helped in providing upward pressures to inflation. In 2015 and early 2016 transport prices had provided a downward pressure on inflation; however it has eased in 2016 and have an upward impact now, stated ONS. On the other hand, prices of non-alcoholic beverages and food have provided the largest downward pull on inflation in the month and in 2016 to date.

The CPI ‘core’ rate, which strips food, energy, tobacco and alcohol, also rose in September. It accelerated to 1.5 percent year-on-year in September from 1.3 percent in the prior month. Core inflation also came in slightly above the consensus expectations. Meanwhile, retail price index inflation accelerated to 2 percent annually from August’s 1.8 percent. This reflects certain residual pass-through of the August Bank Rate reduction to the mortgage interest payments component.

There were widespread rises in the month. Forecourt fuel prices rose 1.2 percent pulling up overall energy prices by 0.7 percent on the month. The pickup in headline inflation came in despite a 0.3 percent drop in food prices, relative to 2015’s 0.1 percent decline in September.

“Still, with sterling around 20 percent below its 2015 peak on a trade-weighted basis, further upward pressure on import costs, particular for food, is likely to feed through in coming months”, said Lloyds Bank in a research note.

The data released today gives a sign that the likely increase in inflation after the recent drop in sterling is in motion. Inflation is still expected to overshoot the 2 percent target from the second quarter of 2017. This reflects the upward pressure from weaker sterling and the mere absence of sharp decline in oil price as in 2015, added Lloyds Bank.