July's CPI doesn't throw a spanner in the works

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The latest CPI inflation report suggests the Bank of England remains on track to start raising official interest rates early next year.

The annual inflation rate climbed 0.1% in July after neither rising nor falling in the previous month. The main driver was an increase in the prices for clothing and footwear, suggesting the discounts in summer sales was less generous than last year.

The outcome was roughly in line with the BoE’s forecasts that inflation will rise to 0.3% in the fourth quarter of this year, 1.5% by late 2016, and 2.1% by the end of 2017. Consequently, the bank remains on track to increase the main refinancing rate by 25 basis points to 0.75% in early 2016. The bank targets an inflation rate of 2% in the medium-term, that is, in one to three years’ time. The CPI has been hovering at or near zero since February, thanks to low crude oil and food prices, and the stronger pound pushing down import prices.

Policymakers last week reiterated they remain focused on domestic demand-driven inflation, and that the exact timing of the rise in the Bank rate would depend upon factors including developments in core CPI, that is, the CPI excluding energy, food, alcoholic beverages and tobacco. The core CPI rose to a six-month high of 1.2% in July, implying demand-pull pressures have started to build.

Producer prices, a forward indicator of inflation pressures, suggest that CPI inflation will remain weak in the next month or so. There are signs that producer prices have started to stabilize: factory gate prices fell 1.6% in year-ago terms in July for the third consecutive month, while that of material and fuels bought by manufacturers for processing dropped by less than in the previous month.

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