"If we see inflation at this level or edging up over the next couple of months then that might be a green light to the hawks at the BOE to start voting for a rate increase"
- Philip Shaw, chief economist at Investec Securities Ltd.
U.K. inflation rose more than expected in June to its fastest pace since January, driven by clothing, food and air fares, reinforcing the view that a rise in interest rates may be getting closer. Annual rate of inflation accelerated 1.9% up from 1.5% in May, the Office for National Statistics said, overshooting analysts' expectations for a 1.6% rise. The pickup takes the annual rate of inflation closer to the central bank's 2% target. Annual inflation has now been at or below 2% for seven consecutive months, the longest streak of near-target price gains since 2005, helping the Bank of England to postpone raising interest rates despite U.K.'s surprisingly robust economic recovery. Core CPI, which excludes energy, food, alcohol and tobacco, rose by 2.0% in June compared with the same month last year. The Pound strengthened, gaining more than 0.3% immediately after the release of data to trade at $1.7142.
There is evidence that the increase in inflation in June may prove to be temporary. Inflationary pressures elsewhere are weak: wage growth is subdued and prices charged by companies at the factory gate inched higher just 0.2% on the year in June, the slowest pace of annual producer-price inflation since October 2009. The prices companies pay for raw materials dropped 4.4% on the year, ONS data reveals.
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