UK’s inflation beats expectations, buoyed by rising airfares and higher oil prices

Data released by the Office for National Statistics earlier on Tuesday showed the UK inflation accelerated more than forecast in June buoyed by rising airfares and higher oil prices. Data showed that UK inflation picked up in June to an annual rate of 0.5 percent from 0.3 percent y/y in May, beating consensus for a more modest rise to 0.4 percent y/y. Much of the rise was the result of European air travel, possibly connected to the Euro 2016 football tournament, the ONS said.

The CPI ‘core’ rate (excluding energy, food, alcohol and tobacco) firmed to 1.4 percent y/y from 1.2 percent y/y in May, also above expectations of a more muted gain. RPI inflation firmed to 1.6 percent y/y in June from 1.4 percent y/y in May, with the RPI index at 263.1 exceeding consensus forecast.

Airfares jumped 11 percent in June from May, partly due to the Euro 2016 football championship in France, which saw England progress to the second round of the tournament before losing to Iceland. The ONS said the rising cost of oil also helped to “nudge up” the index.

It is worth noting that the data were collected before the June 23 UK referendum and the recent drop in the pound is not captured in the numbers. The fall in the pound relative to other currencies following the Brexit vote will likely put upward pressure on inflation in the short term. That might force the Bank of England to raise interest rates sharply in order to bring inflation back under control. The July release, set to be published on August 16, will be the first to cover the post-referendum period.

Chris Williamson, chief economist at HIS Markit, said the rise in inflation was “likely to be the start of a rising trend in prices as costs march higher in response to the recent slump in sterling.”

In a separate release ONS official house price index covering the period to May showed UK house price growth unchanged at 8.1 percent y/y, corroborating the recent upward pressure seen in the RPI housing depreciation component.