Inflation leap adds to rates rise pressure

Mark Carney told MPs yesterday new measures to curb 'riskier' mortgage lending were an 'insurance policy'. Picture: PA
Mark Carney told MPs yesterday new measures to curb 'riskier' mortgage lending were an 'insurance policy'. Picture: PA
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The prospect of an interest rate hike for hard-pressed families by the end of the year moved a step closer yesterday with the biggest jump in inflation for almost two years.

Higher prices for clothing, footwear, food and non-alcoholic drinks prices saw the UK inflation rate reach 1.9 per cent in June, up from 1.5 per cent in May, according to the Office for National Statistics (ONS).

But wages are only rising at about half this level, heaping more pressure on working families.

Another indication of rising living costs saw house price rises continue unabated, up by 4.3 per cent in Scotland according to new figures and up by more than 10 per cent UK-wide.

Markets appeared to anticipate a looming UK interest rate rise, as yesterday’s inflation rise was met with a surge in sterling.

It has brought inflation closer to the Bank of England’s 2 per cent target.

The Bank’s governor Mark Carney has already warned that interest rates could increase this year above the record low of 0.5 per cent.

But he said yesterday there is no need to reverse the rise in house prices and he is not considering measures to cool the market.

Economists said that the price rises may strengthen the case for an increase in UK interest rates, especially against a backdrop of rising house prices and falling unemployment.

“The news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike,” said Chris Williamson, chief economist at research firm Markit.

He added that fine June weather may have led retailers to hold back on summer clothing discounts. Women’s clothing prices contributed heavily to the surprise jump in inflation, with air fares and furniture costs also pushing the rate up, the ONS said.

The UK economy is growing again after the worst recession in a generation following the 2008 banking crash.

It grew by 0.8 per cent in the first three months of the year.

With greater confidence in the strength of the economy, there is less reason to keep rates at historic lows to stimulate growth.

Jeremy Cook, chief economist at currency firm World First, said the rise in prices was “a big surprise”. “Inflation is now rising at its fastest rate since January, with clothing, food and transport contributing well,” he said.

Wage rises began to match inflation in April, after six years of falling real wages.

But the latest figures show wages rising at less than 1 per cent, well below the 1.9 per cent rise in prices recorded in June, meaning household incomes are being squeezed again.

House prices are continuing to rise across Scotland, separate figures show, with the average property price up 4.3 per cent on last year, according to a new report.

The average cost of a home reached £162,302 in May, marking the longest run of price growth since before the financial crisis, the latest LSL Scotland House Price Index shows.

It is the ninth month in a row that the cost of a house has risen in Scotland.

In London, house prices rose by a record annual rate of 20.1 per cent in May, separate figures showed, as overall growth in the UK climbed to 10.5 per cent.

The average home in the capital now costs £492,000 – compared to £262,000 across the country, according to the ONS.

Outside London and the south-east, annual price increases averaged 6.4 per cent, the highest rate since June 2010. 
Mr Carney appeared before Westminster’s Treasury select committee yesterday after the Bank’s financial policy committee (FPC) last month announced plans to curb riskier mortgage lending.

The governor said the FPC’s measures – which include a new cap on high loan-to-income value loans and stronger affordability “stress tests” for borrowers – were an “insurance policy” rather than an attempt to reverse increases.

The governor said the Bank was not “currently contemplating any additional measures” to cool the housing market.