Inflation Increased Unexpectedly in UK during June

A shopping spree by the British during June drove a big unexpected increase in inflation in the UK that fueled expectations the Bank of England might start increasing its interest rates sooner than later and possibly by year end.

Tuesday’s figures released by the Office of National Statistics indicated that consumer prices increased by an annualized rates of 1.9% during June, which was just under the ostensible target for the Bank of 2%.

Inflation, which increased from the 4 ½-year low in May of 1.5%, has reached its highest mark since January.

The market consensus was for an increase of 1.6%, which was more modest. The figures that surpassed the forecast gave the British sterling pound another boost helping it increase by 0.4% to reach $1.76 against the U.S. dollar as traders took into account a faster than anticipated increase in interest rates.

The pound is approaching a high it hit earlier in July, which marked its highest level since the height of the financial crisis during October of 2008.

Much of June’s increase in inflation was thanks to a demand for new clothing. Usually during the summer, prices fall as retailers slash prices during the traditional season for sales, but one senior economist said the good weather might have led retailers to delay or even do away with any sales as consumers hit the malls.

The economy in the UK growing faster than the majority of other developed economies, pressure has mounted on the BoE to start bumping up interest rates. The main interest at the bank has been sitting on its all time low since March of 2009 at 0.5%.

Other figures showed that prices of homes were up by 0.8% in May, which also reinforced the expectations that England’s central bank could increase borrowing costs as a way to prevent another potential housing boom that could be destabilizing.

More answers to what the Bank of England is thinking will come to light during August when it releases its quarterly projections for the economy and the first estimate of economy growth for the second quarter on July 25.

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