Inflation in the U.K. increased unexpectedly in June, raising expectations that the Bank of England may start raising interest rates soon, possibly by the end of this year.
Figures Tuesday from the Office for National Statistics showed consumer prices rose by an annual rate of 1.9 percent in June, just below the Bank's ostensible target of 2 percent. Inflation, which rose from May's 4 1/2-year low of 1.5 percent, is now at its highest level since January.
The consensus in the markets was for a far more modest increase of 1.6 percent.
With the U.K. economy growing faster than most other developed economies, the pressure is mounting on the Bank of England to start increasing interest rates, especially if inflationary pressures are starting to build. The bank's main interest rate has been at an all-time low of 0.5 percent since March 2009.
"The news will further fuel expectations that the Bank of England will start rising interest rates sooner rather than later, with November looking the most likely month for the first hike," said Chris Williamson, chief economist at Markit.
Separate figures showing that house prices rose by a monthly rate of 0.8 percent in May also reinforced expectations that the central bank will have to raise borrowing costs to prevent another potentially destabilizing housing boom.
The pound also rose 0.3 percent to $1.7140.
Ben Brettell, senior economist at Hargreaves Lansdown, said the unexpected rise in inflation will raise speculation that the first interest rate rise "could be round the corner," but cautioned that it was important not to look at one month's figures in isolation.
He said much of the increase in the June inflation rate was due to clothing. Usually prices fall in the summer as retailers cut prices during the traditional sales season, but Brettell said they may have declined to cut prices this time because of the good weather, which traditionally prompts consumers to go out and shop.
More insights into the Bank of England's thinking will emerge in August when it publishes its quarterly economic projections and the first estimate of second-quarter economic growth on July 25. The consensus in the markets is that the U.K. economy, Europe's third-largest, grew by a quarterly rate of 0.8 percent during the three-month period, equivalent to an annualized rate of around 3.2 percent.
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