The Brexit price squeeze is back as UK inflation unexpectedly jumps for a 2nd month

  • CPI inflation increases to 2.7% in August, up from 2.5% in July, confounding economists forecasts.
  • Inflation has now unexpectedly risen for two consecutive months.
  • Goods increasing in price in the months including theatre tickers, clothing, and sea fares, the Office for National Statistics said.
  • The pound jumped on the data release, hitting its highest level since July against the dollar.

Inflation in the UK unexpectedly jumped for a second consecutive month in August, surprising forecasters who had expected the rate of price increases to fall.

The Office for National Statistics (ONS) said on Wednesday that consumer price inflation (CPI), the most watched measure of UK inflation, increased to 2.7% in August, up from 2.5% in the previous month. CPI had been expected by economists polled prior to the release to drop to 2.4% during the month.

CPIH, the ONS’ preferred method of measuring inflation was also higher in the month, hitting 2.4%, up from 2.3% in July.

“Consumers paid more for theatre shows, sea fares and new season autumn clothing last month. However, mobile phone charges, and furniture and household goods had a downward effect on inflation,” Mike Hardie, the ONS’ head of inflation said in a statement.

Here’s the chart showing August’s data in the context of the last decade:

Screen Shot 2018 09 19 at 09.42.14Office for National Statistics

Inflation in the UK had been subdued for several years prior to the vote to leave the EU in June 2016. But the vote caused a fall in the value of the pound, which pushed up inflation.

As the pound has recovered, inflation once again started to fall, dropping from 3% at the end of 2017 to 2.4% in June. It has since picked up though, with July’s reading of 2.5% followed by Wednesday’s unexpected jump.

While Wednesday’s data shows a second month of unexpected price rises, Ruth Gregory, senior UK economist at Capital Economic still believes that this late summer jump will be short-lived.

“The unexpected rise in CPI inflation from 2.5% to 2.7% (consensus 2.4%) came as a bit of a nasty surprise, but it does not alter our view that CPI inflation will be back at the 2% target by this time next year,” she wrote in an email soon after the release.

“Admittedly, the fact that the rise in inflation was driven by a pick-up in core CPI inflation (excluding food, energy, alcohol and tobacco) from 1.9% to 2.1% will raise fears that underlying inflation pressures are on the up again.

“But the increase in the core rate was driven by a sharp jump in the volatile theatre, airfare and clothing components which are likely to be temporary.”

Regardless of whether or not the trend is shortlived,the pound reacted strongly to the news, climbing about the 1.32 mark against the dollar for the first time since late July.

By 9.50 a.m. BST (4.50 a.m. ET), 20 minutes after the release, it was trading at $US1.3205, a gain of 0.44% on the day:

Screen Shot 2018 09 19 at 09.49.48Markets Insider

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