Annual inflation in the U.K. accelerated in August, a pickup likely to reinforce the Bank of England’s view that interest rates may soon need to rise despite modest growth.
The British pound hit a one-year high after the data were released, climbing 0.7% to $1.3257.
The Office for National Statistics said Tuesday that consumer prices rose 2.9% in August compared with a year earlier, as prices for clothing and footwear rose at the fastest annual pace since records began.
The pickup in inflation, from a 2.6% annual rate in July, was larger than economists polled by The Wall Street Journal were expecting. The 2.9% pace recorded in August was last hit in May, and was last higher in April 2012, when price growth hit 3%.
Officials at the Bank of England signaled last month that their tolerance of inflation in excess of their 2% target is wearing thin. The central bank is grappling with weak growth as well as rising prices, which have been propelled higher by a steep fall in the pound since Britons voted to leave the European Union in June 2016.
The BOE’s dilemma contrasts with the landscape faced by central banks including the U.S. Federal Reserve and the European Central Bank, which are instead facing subdued inflation despite above-par growth.
BOE officials are expected to keep their benchmark interest rate steady at 0.25% when they announce this month’s policy decision Thursday. But BOE Gov. Mark Carney has said borrowing costs will need to rise sooner than investors expect, even if growth remains modest. Some economists expect the BOE to gently nudge up borrowing costs early next year.
The pickup in inflation also adds to pressure on British households, whose spending has long powered broader growth in the economy. Economists say business investment and exports will need to rise to keep the economy motoring.
ONS data shows inflationary pressures show few signs of abating. The prices charged by companies at the factory gate rose in August at an annual rate of 3.4%, while the cost of firms’ raw materials rose 7.6%, fueled by increasing crude oil prices.
Source: Dow Jones