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Dearer fuel and higher air fares push inflation to 0.5% in June

Published 19/07/2016

The CPI inflation figure is expected to nudge up from 0.3% to 0.4%
The CPI inflation figure is expected to nudge up from 0.3% to 0.4%

Inflation rose to a higher-than-expected 0.5% last month after fuel prices increased and the Euro 2016 football tournament helped drive up the cost of air fares, new figures show.

The Office for National Statistics (ONS) said Consumer Price Index (CPI) inflation in June was up from 0.3% in May and matched the 15-month high recorded in March.

CPI also came in higher than economists' expectations of a rise to 0.4%.

Last month's hike in the cost of living came in part from soaring flight prices, which climbed by a record 10.9% between May and June, pushed higher by more expensive air fares to Europe.

But the ONS said it was too early to see the impact on inflation of the plunge in the value of the pound triggered by Britain's decision to leave the European Union.

ONS statistician Phil Gooding said: "The rising cost of European flights, possibly boosted by the Euro football championships, was the biggest reason for this month's increase in inflation.

"The growing cost of oil, feeding through to petrol prices, also helped nudge up CPI.

"Today's figures were collected before the EU referendum, so recent falls in the value of the pound will have had no impact on them."

Overall transport prices rose by 1.1% between May and June this year, compared with an increase of 0.2% over the period in 2015, due to a hike in the cost of European flights.

A rise in the price of filling up at the pump also had an upward impact on CPI, picking up more than it did a year ago, with the cost of petrol and diesel climbing by 2.3p and 2.6p per litre respectively between May and June this year.

The price of petrol was 111p per litre in June, while the price of diesel reached 112.1p per litre last month.

The cost of recreation and culture was also up by 0.6% this year, compared with a 0.1% fall a year ago, driven in part by the rising cost of computer games.

But these price increases were offset by a slide in the cost of furniture, household equipment and maintenance, with overall prices dipping 0.3% between May and June this year.

The impact came from falling price tags for furniture, furnishings and kitchen units.

The ONS said the Retail Prices Index (RPI) - a separate measure of inflation, which includes housing costs - rose to 1.6% in June, up from 1.4% in May.

The CPI figures come amid a bleak outlook for the UK economy, with many economists slashing their growth forecasts and some pencilling in a potential recession following the Brexit vote.

The Bank of England held back from cutting interest rates from 0.5% this month, where they have remained since March 2009, but signalled a rate cut could come in August.

Investors and economists were taken by surprise, having expected the Bank to cut rates to 0.25% after governor Mark Carney said in June that action would be taken over the summer.

Since then, Bank policymaker Martin Weale has questioned whether interest rates should even be slashed in August.

He said on Monday that the Bank was "not a nurse to markets" and there were no signs that consumers or businesses were "panic-struck" following Britain's decision to leave the European Union.

Ben Brettell, senior economist at Hargreaves Lansdown, said the CPI update was "past its sell-by date" given that the data was collected before Britain voted to leave the European Union.

He added: "By its nature most economic data is backward-looking. In a world of gradual change this doesn't matter - it's possible to infer the direction of travel by looking at what has just happened. However, seismic events such as the EU referendum can render such data irrelevant.

He added: "The data was gathered by the ONS prior to the EU referendum, so doesn't include the effect of sterling's dramatic fall since the vote.

"Sterling's weakness means higher import prices, and this is expected to feed through to significantly higher inflation figures in the coming months.

"Forecasts suggest it could reach 3%-4%. However, this will be a temporary factor - assuming sterling remains weak, the effect will fall out of the year-on-year calculation in the second half of next year."

Chris Williamson, of IHS Markit, said inflation was likely to breach the Bank of England's 2% target next year, "possibly by some margin".

But he said policymakers were expected to "look through" any rise in inflation caused by the Brexit-related slump in the pound, focusing instead on the job of shoring up economic growth.

"Interest rate cuts and non-standard measures such as additional asset purchases are therefore widely expected to be seen when the MPC next meets in August.

"The immediate need for policy action of course depends on the extent to which business activity has been hurt by the uncertainty caused by the referendum, more of which will be known on Friday with the release of flash PMI data for July."

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