U.K. Inflation Unexpectedly Accelerates on Transportation, Games

(Bloomberg) -- U.K. inflation unexpectedly accelerated in August, boosted by the cost of theater shows, computer games, transport fares and clothing.

The jump to 2.7 percent from 2.5 percent may raise questions about how quickly inflation will return to the Bank of England’s target. The central bank increased interest rates last month to tame emerging price pressures, and some economists were expecting inflation to slow to the 2 percent goal by year end, earlier than officials forecast in August.

The pound jumped after the data, reaching the highest in two months. It was up 0.4 percent to $1.3206 as of 9:46 a.m. London time. Bets on another BOE rate hike by mid-2019 rose.

U.K. Inflation Unexpectedly Accelerates on Transportation, Games

The BOE expected the inflation rate to slow to 2.4 percent last month, as did economists in a Bloomberg survey. Instead it rose to the highest since February. Upward pressure came mainly from the recreation and culture sector, where prices jumped 3.6 percent, the most since 2010. There were offsetting influences from furniture, auto fuels and mobile-phone charges.

What our economists say...
“We doubt it will shift thinking at the Bank of England. The gain reflected a confluence of price gains in volatile categories, which say little about underlying inflationary pressure. We still expect inflation to slow in the coming months, especially as the influence of sterling’s past weakness wanes.”

--Dan Hanson and Jamie Murray, Bloomberg Economics. Read the full REACT

Core inflation, which excludes volatile food, energy, tobacco and alcoholic drinks, rose to 2.1 percent in August.

Money markets are now pricing in a 69 percent chance of BOE tightening in May, up from about 60 percent yesterday. That’s after Britain formally leaves the European Union in March. But all bets would be off if the nation crashes out of the bloc without a deal.

U.K. Inflation Unexpectedly Accelerates on Transportation, Games

The pickup in price growth is bad news for British workers, whose wages are still barely outstripping the rate of inflation. Real wages remain below their levels before the financial crisis.

Producer input prices rose 0.5 percent on the month, taking the annual rate of increase to 8.7 percent. Output prices rose 2.9 percent on the year.

©2018 Bloomberg L.P.