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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound hits one-year high as UK inflation rate jumps to 2.9% - as it happened

A rack of clothes.
Clothing prices jumped by 2.4% in August, pushing the UK inflation rate up Photograph: Alamy Stock Photo

Afternoon summary

Right, time for a recap.

The cost of living squeeze in Britain just became more uncomfortable, after inflation unexpectedly rose in August.

The consumer prices index spiked to 2.9% in last month, from 2.6%, equalling May’s four-year high. Shoppers suffered a big jump in clothing prices, particularly for womenswear, plus pricier petrol at the pumps.

Economists blamed the weak pound, which has made imports pricier.

Core inflation rose to 2.7%, its highest level since 2011, putting more pressure on the Bank of England to consider an interest rate hike.

Speculation that the BoE could raise borrowing costs sent the pound soaring. It’s currently trading at a one-year high against the US dollar, at $1.327, and a six-week high against the euro at €1.11.

As this chat from the Bond Vigilantes team at M&G shows, inflation is almost a whole percentage point over the BoE’s 2% target.

Unions have renewed their calls for the public sector pay cap to be abolished for all workers; otherwise staff such as nurses and teachers will continue to suffer a significant real wage cut.

The public sector pay squeeze
The public sector pay squeeze

The jump in the pound pulled shares down in London (as it could hurt exporters). But other markets have continued to rally, sending global markets to their highest ever levels.

Connor Campbell of SpreadEx says:

The markets remained dominated by the reaction to the morning’s UK inflation reading, with a bit of North Korea/Hurricane Irma relief thrown in for good measure.

That relief has sent the MSCI All Country World Index to a new alltime high this afternoon.

Here’s our latest inflation news story:

And that’s all for today. Thanks for reading and commenting. GW

Updated

Newsflash: Britain’s next budget will be delivered on 22nd November.

This will be chancellor Philip Hammond’s opportunity to announce new tax and spending plans, perhaps tear up the public sector pay cap, and try to guide the economy through the Brexit process.

It’s worth noting, though, that police and prison staff only make up 6% of the total public sector work force.

Plus, the pay increases announced today are unfunded, so savings or cuts must be made elsewhere to pay for them.

Here’s another depressing, and informative, chart from the Resolution Foundation, showing how public sector workers have suffered falling real wages for much of the last decade.

The pay squeeze goes on
The pay squeeze goes on Photograph: Resolution Foundation

In the last hour, the government has announced that the 1% pay cap will be lifted for the police and prison workers. They’ll get pay rises of 2% and 1% respectively -- still not enough to keep up with inflation.

Trade unions have already warned that it’s not enough.

Depressingly, the rise in UK inflation will fall particularly hard on poorer families.

That’s because they spend a greater proportion of their income on food, clothes and housing, where prices have risen above average this year.

Stephen Clarke of the Resolution Foundation has tweeted the details:

Fox's Sky bid faces broadcasting standards scrutiny

Important media news: Rupert Murdoch’s attempt to take control of Sky has hit a potentially serious hurdle.

Culture secretary Karen Bradley has just announced that she’s ‘minded’ to refer the bid to the competition authorities on the grounds of broadcasting standards (basically, whether Fox is a fit owner).

That’s a new development; Bradley is also planning to refer the bid on the grounds of media plurality.

Here’s the full story:

Sky’s shares have fallen by almost 3%, to their lowest level since Murdoch made his bid last December, as traders digest this new development.

Sky’s share price over the last 12 months.
Sky’s share price over the last 12 months. Photograph: Thomson Reuters

What should the Bank of England do?

Today’s inflation figures will be high on the agenda when the Bank of England meets later this week to set interest rates.

Last month, the MPC voted 6-2 to leave borrowing costs unchanged, with the majority judging that the economy was too weak to justify a hike.

On Thursday, the committee will be up to full strength of nine policymakers as new deputy governor Dave Ramsden joins the throng. So could policymakers decide ‘enough is enough!’ and raise interest rates from their record low of 0.25%?

City experts are divided on this issue.

Emanuele Canegrati of BlackPearlFX argues that the BoE should use the levers of monetary policy to get inflation down to its 2% target, and ease the cost of living squeeze.

Ben Lord of M&G predicts that the Bank’s chief economist, Andy Haldane, will vote for a rate hike on Thursday, resulting in a 6-3 split but no rate rise.

Lord believes that the Bank should sit tight, as inflation may peak soon.

“Increased disagreement on the MPC will likely lead to some sterling strength, in the short term at least...

But if we are a month or so away from peak inflation, to hike rates and strengthen the pound....would be overly myopic and pro-cyclical in my view.

Kathleen Brooks of City Index points out that the City believes there is a greater chance of a rate rise before Christmas.

The Overnight Index Swaps market has already rushed to price in a greater probability of a rate hike from the BOE by year end. The market now expects a 30% chance of a hike in December, this compares with 20% a week ago.

Pound hits six-week high against the euro

It’s too late for most British holidaymakers, but the pound is rallying against the euro this morning, as well as the dollar,

Sterling has gained 1% against the European single currency to €1.112, the highest level since the start of August.

That means one euro is worth 89.9p, having hit 93p at the end of last month.

London hit by house price slowdown

We also have fresh evidence that the housing boom in Britain’s capital is faltering.

London house prices rose by just 2.8% in the 12 months to July 2017, much slower than the national average of 5.1%.

Indeed, that makes the London the slowest region in England.

London continues to be the region with the highest average house price at £489,000, followed by the South East, at £321,000, and the East of England, at £290,000 respectively.

Public sector workers will see their real wages shrink by around 2% this year, unless the pay cap is dropped.

Liberal Democrat leader Vince Cable says Theresa May’s government needs to act urgently:

“Rising inflation shows how urgent it is to address the sense of unfairness around the pay cap.

“With these numbers our nurses, teachers and other public sector workers will experience a 2% pay cut in the coming year. This will only aggravate the recruitment and retention crisis we are facing.

“The government must take urgent steps to lift the pay cap for all public sector workers, and increase wages in line with inflation.”

Andrew Sentance of PwC (and a former Bank of England interest-rate setter) fears that inflation will keep rising as the full impact of the weak pound ripples through the economy.

He predicts that the consumer prices index will rise over 3% later this year, weakening growth.

With very well-developed and complex supply chains, it can take a number of years for a decline in the exchange rate, which raises import prices, to feed through fully to consumers.

“This suggests that the recent squeeze on consumer spending from higher inflation will continue to dampen growth in the UK economy in the second half of this year and next year. There is not much sign yet that consumers will get any early relief from the surge in inflation following the Brexit vote last summer.”

Updated

The pound has now clawed back half of the losses suffered after the Brexit vote, but is still worth 10% less than in June 2016.

Britain is now suffering its SECOND cost of living squeeze in a decade.

As thus chart shows, inflation (in pink) outpaced wage growth once the financial crisis began in 2008. Real wages didn’t turn positive until 2014, but have been shrinking since early 2017.

The Treasury have sent a comment over, but it doesn’t reveal whether the public sector pay cap is being axed....

‘We know some families have concerns with their day to day cost of living.

That’s why we are boosting take home pay with tax cuts for over 30 million people and a National Living Wage that is giving the lowest earners their fastest pay rise for 20 years.’

Updated

Ranko Berich, Head of Market Analysis at Monex Europe, says Britain’s inflation rate has “smashed expectations”, which is why the pound spiked to one-year high.

He fears that it will hurt consumer spending in the coming months (which will be bad for growth).

Berich adds:

“The breadth of today’s inflation surprise is striking. All of the headline price indices, including Core CPI, PPI and RPI printed higher than median forecasts. The record 4.6% increase in clothing and footwear indicates that retailers are passing cost increases straight to consumers.

On the whole, today’s figures highlight just how hard inflation is continuing to bite into real wages, although it will be interesting to see how nominal wages perform in tomorrow’s labour market data. As real wages fall, consumer spending is likely to come under further pressure this year, after a wobble in the first quarter.

Core inflation hits six-year high

City economists are concerned to see that Britain’s ‘core’ inflation rate has hit a six-year high, at 2.7%.

Core inflation strips out volatile factors like petrol and food, and is meant to give a better picture of economic pressures.

Andreas Wallström of Nordea Markets predicts that this makes an early interest rate rise more likely.

Economist Rupert Seggins agrees that the Bank of England’s Monetary Policy Committee will be concerned.

He’s tweeted a chart, showing how core inflation typically lags behind the exchange rate by about two years. If that relationship holds, the Brexit impact hasn’t arrived yet....

Edward Hardy, economist at currency firm WorldFirst, blames bad weather and geopolitical worries for driving inflation up.

Hardy says:

“Petrol prices have come back to bite: after two months of stagnant energy costs, weather disruption in the Gulf of Mexico twinned with geopolitical tensions on the Korean peninsula have lit a fire under commodity prices .

The recent recovery in the eurozone is also a factor. The euro hit an eight-year high against the pound in August, which makes imports from Europe more expensive.

Britain’s inflation rate has been driven up by the slump in the pound in the summer of 2016, after the Brexit vote.

Ben Brettell, senior economist at Hargreaves Lansdown, suspects that UK inflation may now be peaking.

The public will hope he’s right, as wages are certainly not keeping pace with the cost of living.

Brettell says:

Inflation ticked up again in August, with increased petrol and diesel prices contributing to a year-on-year figure of 2.9%, up from 2.6% in July and matching May’s four-year high.

This will inevitably raise questions about the UK’s ongoing cost of living squeeze. Data released tomorrow is expected to show pay increasing at 2.2% in the three months to July, meaning wages are still shrinking in real terms.

Yet it looks likely that inflation will fall back in the coming months, as the effect of Brexit-induced sterling weakness falls out of the year-on-year calculation.

TUC: Pay cap must be abolished

TUC General Secretary Frances O’Grady.

Trade unions say the UK government must now drop its pay cap on public sector workers, to give them more protection against inflation.

TUC General Secretary Frances O’Grady says:

“The cost of living squeeze continues, with rising inflation outpacing wages.

“The government needs to get a grip and get pay rising across the economy. A good start would be to scrap the pay cap for all public sector workers.

There is speculation that Theresa May’s government is preparing to lift the cap, for police officers and prison workers.

That’s not enough, though, O’Grady warns:

“Our dedicated public servants are a team. A pick and mix approach, that rewards some and not others, would be cynical and plain unfair.”

Pound hits one-year high

Boom! The pound has hit a one-year high against the US dollar, following the spike in the cost of living.

Sterling has gained a whole cent against the dollar to hit $1.3280, the strongest level since mid-September 2016.

The pound against the US dollar over the last year
The pound against the US dollar over the last year Photograph: Thomson Reuters

Traders are calculating that August’s inflation surge means the Bank of England is more likely to raise interest rates soon.

Updated

On an annual basis, clothing and footwear inflation in Britain has hit 4.6%.

That’s the highest level since the last days of the Thatcher administration, according to City economist Simon French of Panmure Gordon.

Buying clothes became rather pricier last month....

Inflation: by sector

Why inflation has gone up

Clothing and travel costs drove the cost of living up in August.

Average clothing prices jumped by 2.4% between July and August 2017, with women’s clothing becoming particularly pricier.

Fuel costs also rose -- with petrol prices jumping by 1.8 pence per litre.

Air fares rose as usual between July and August, by 10.9% (because it is peak holiday time...)

This chart shows how the consumer prices index (in yellow) has risen sharply over the last year - back to levels seen in May this year, and in June 2013.

UK inflation rates
UK inflation rates Photograph: ONS

UK inflation jumps to 2.9%

BREAKING: Britain’s inflation rate has jumped to 2.9% in August, from 2.6% in July.

That equals the four-year high struck in May this year.

It means British households are still facing a cost of living squeeze, as wages are currently rising by around 2.1%.

More to follow!

The pound just hit a four-week against the euro, at 90.605p.....

Economist Marc Brütsch of Swiss Life predicts that UK inflation spiked to 2.9% in August, from 2.6% in July.

Royal Bank of Scotland predict that the Consumer Prices Index rose by 2.8%, but will spike over 3% this autumn.

Just 15 minutes to wait....

Expectations that Britain’s inflation rate rose in August are pushing sterling higher this morning.

The pound is up almost half a cent at $1.321 against the US dollar.

A high inflation reading puts more pressure on the Bank of England to raise interest rates from the record lows (making it more lucrative to hold money in pounds).

Boats are mangled into a mess at Bayshore Marina in Miami, Florida.
Boats are mangled into a mess at Bayshore Marina in Miami, Florida. Photograph: UPI / Barcroft Images

It says something about the financial markets that shares can rally on the back of a devastating storm that was only slightly less awful than feared.

But what? Analysts at ING told clients this morning that investors are remarkably relaxed:

“Whether that equity reaction is Panglossian complacency or a sign of wonderful underlying fundamentals remains open to question.

Even Category 5 storms can now be added to the list of things that ’Don’t Really Matter’.

If in doubt, blame the media.....

Updated

European stock markets are pushing higher in early trading, as the momentum from Wall Street’s rally ripples back to the City.

European stock markets
European stock markets Photograph: Thomson Reuters

Naeem Aslam of Think Markets says traders have regained their appetite for riskier assets.

Investors are surely feeling less concerned about the potential hurricane damage cost. This has brought back the traditional risk on trade.

Updated

The new (and watered down) sanctions on North Korea agreed by the United Nations last night are also boosting the markets today, says Matt Simpson, senior market analyst at Faraday Research.

Global stocks hit fresh record highs

World stock markets are at record highs this morning, thanks to relief that the economic cost of hurricane Irma will probably be lower than feared.

Last night, America’s S&P 500 index finished at its highest ever level, with insurance firms surging.

Asian stocks have hit a 10-year high today, and European markets are also up in early trading.

This has driven the MSCI All Country World Index - a broad measure of stocks around the globe - up to a new alltime peak of 484.12 points.

MSCI All Country World Index
MSCI All Country World Index Photograph: MSCI

Overnight, most powerful storm in Atlantic history has been downgraded to a tropical depression after causing terrible damage in the Caribbean, and in the Florida Keys region.

The repair bill will run into many tens of billions, but is likely to miss the worst-case estimates - because Irma changed course and didn’t strike a direct hit on the cities of Miama and Tampa.

That’s a relief for the insurance industry, who were looking at a £150bn bill for Irma at one stage.

But traders should remember that 10 fatalities have been reported in the US, and another 37 in the Caribbean. Irma has still been a monster. US officials are warning of a possible humanitarian crisis unless power and water can be restored, and the clean-up job will be huge.

Updated

The agenda: UK inflation to show cost of living squeeze continues

A supermarket in London.
A supermarket in London. Photograph: Neil Hall/Reuters

Good morning, and welcome to our rolling coverage of the world economy, the financial market, the eurozone and business.

Britain’s cost of living crisis will rear up again this morning, when new inflation figures are released.

Economists predict that inflation jumped to around 2.8% per year in August, up from 2.6% in July. That’s close to the four-year high of 2.9% which the consumer prices index struck in May.

If so, that would mean that the average Briton’s real pay is falling. Earnings only rose by 2.1% in the three months to June (we get new figures tomorrow), meaning inflation is more than eroding any wage increases.

That’s a particular blow for nurses, doctors and other public sector workers, thanks to the government’s 1% pay cap.

The weak pound is driving inflation higher, by making imports more expensive.

Higher fuel prices are also pushing the cost of living up, according to James Brown of consultancy firm Simon-Kucher:

“For road users, petrol prices are up after the respite given by lower prices over the summer.

“Driving to work cost 5% more in August and early September than last year.”

Separate house price figures will show how Britain’s housing sector performed in July.

It’s a big day for the car industry too, as the Frankfurt Motor Show kicks off.

We’ll also be watching for comments from the Bank of England’s markets director, and the vice-president of the ECB:

The agenda:

  • All day: The Frankfurt Motor Show
  • 9.30am BST: UK inflation for August
  • 9.30am BST: UK house price figures for July
  • 10.20am BST: Bank of England markets director Chris Salmon speaks in Barcelona
  • 3.45pm BST: European Central Bank vice-president Vítor Constâncio speaks in Frankfurt

Updated

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