UK inflation hits 20-month high in July, likely to overshoot BoE's 2 pct target in 2017

The UK consumer prices rose 0.6 percent y/y in July from 0.5 percent seen a month before, beating market forecasts of 0.5 percent, the Office for National Statistics (ONS) revealed on Tuesday. Data was in line with the estimate embedded in the Bank of England’s August Inflation Report. On monthly basis, the UK inflation figures came in line with expectations, dipping -0.1 percent in July versus 0.2 percent seen previously.

The core inflation gauge (excluding energy, food, alcohol and tobacco) eased a bit to 1.3 percent in July versus 1.4 percent last, in line with expectations. RPI inflation firmed to 1.9 percent y/y in July from 1.6 percent y/y in June, with the RPI index at 263.4, both stronger than expected.

Despite some unwinding of a June surge, airfares still posted a seasonal rise this month, but the 15.9 percent increase was smaller than the 21.6 percent gain recorded last year, thereby pushing down on the annual inflation rate. Offsetting pressure came from a 0.7 percent rise in fuel prices, contrasting with a 0.6 percent fall in July last year, and other transport-related costs.

The pound is down by more than 12 percent since the EU referendum and almost 19 percent since its 2015 peak. Fall in the value of the pound had increased the cost of imports for manufacturers. Input prices faced by manufacturers rose 4.3 percent in the year to July, compared with a fall of 0.5 percent in the year to June. The cost of imported food materials rose 10.2 percent, and the price of imported metals rose 12.4 percent.

"The recent recovery of oil prices combined with mounting downward pressure on sterling means the pickup in UK inflation is going to be sharper than on our previous forecasts, even if signs of the pickup are still mixed in today’s first official post-referendum data. We envisage an overshoot of the 2 percent target for CPI from 2017 Q2,” said Lloyds bank in a report.