August rate hike 'less of a dead cert' after surprise inflation figures

Pound to euro exchange rate uk inflation

GettyPound to euro exchange rate UK inflation rates caused the pound to drop

A further rise in CPI is likely to strengthen the case for a Bank of England interest rate hike next month, though concerns that prices are rising faster than wages could see rate-setters have second thoughts.

The reading was below market expectations for a rise to 2.6%.

Clothing and footwear prices fell by 2.1 percent between May and June, the biggest decline for the month since 2012, with the ONS reporting a greater incidence of discounting.

Although the cost of gas and electricity prices increased and the price at the pump hit the highest level for almost four years, consumers benefited from the falling cost of computer games and the summer clothing sales.

Pound to euro exchange rate uk inflation
BloombergPound to euro exchange rate Sterling fell to a four-month low

The surprise figures knocked the pound to its lowest level against the USA dollar since September, as traders considered whether it would cause a pause among the Bank of England's rate-setting Monetary Policy Committee (MPC) who are expected to consider raising interest rates from 0.5% to 0.75%.

Factories, however, have chosen to absorb much of the pressure rather than pass it on to consumers with output prices rising 3.1 percent on the year.

Tom Stevenson, investment director for personal investing at Fidelity International, was also expecting a move higher in inflation. While the central bank worries that growth is close to the modest pace at which it will start to push up inflation, Wednesday's data brought little sign of this.

Sterling fell against the USA dollar to its lowest value in 10 months in response.

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Mr Brettell said the "inflation data combined with...lacklustre wage growth figures could force policy-makers into a re-think". Comments from BoE officials over the next week could be a "game-changer", Monks said, drawing parallels with May, when a spate of poor data thwarted a widely expected rate hike.

This will affect the Bank of England's decision to raise interest rates next month.

A recent jump in oil prices has raised the price of motor fuel, with petrol rising 2.7p per litre on the month to 128p per litre, while diesel rose 2.9p to 132.1p.

Vegetables - including potatoes - also fell 0.9 per cent month on month.

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But some relief emerged for consumers on the high street, where clothing discounts, most strongly felt in men's apparel, left more cash in shoppers' wallets.

United Kingdom retail sales could increase by at least 0.4 per cent. Upward pressure also came from electricity and gas prices after suppliers including British Gas, EDF and Scottish Power increased their tariffs in response to higher wholesales costs.

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