UK inflation quickens more than forecast on airfare surge

Bloomberg

U.K. inflation accelerated more than economists forecast in June, boosted by airfares on trips to continental
Europe.
The rate rose to 0.5 percent from 0.3 percent in May, the Office for National Statistics said in London on Tuesday. Economists had expected 0.4 percent, according to the median estimate in a Bloomberg survey. Core inflation, which excludes volatile food and energy prices, strengthened to 1.4
percent.
Airfares jumped 11 percent in June from May, partly due to the Euro 2016 football championship in France, which saw England progress to the second round of the tournament before losing to Iceland. The ONS said the rising cost of oil also helped to “nudge up” the index.
While the reading is still well below the Bank of England’s 2 percent target, it matches the highest level since late 2014 and economists say the pound’s drop since Britain’s decision to quit the European Union will probably help push it even higher. The central bank signaled last week it’s readying stimulus for August as the economy reels from the Brexit fallout.
“The outlook for inflation is somewhat different now than it was before the referendum result,” said Sam Hill, senior U.K. economist at RBC Europe in London. “A short-term spike in inflation is expected to temporarily push CPI inflation above target in 2017. From a monetary-policy perspective we nevertheless continue to think more medium-term economic weakness will dominate and lead to looser policy.”
The BOE surprised markets last week when it kept its key interest rate unchanged and shifted its focus to the August meeting, when the Monetary Policy Committee will publish new growth and inflation forecasts. Officials have said sterling’s sharp drop will put upward pressure on short-term price growth, though they have differing views on the medium term.
The pound fell 0.4 percent to $1.3197 as of 10:59 a.m. London time. It dropped to a 31-year low of $1.2798 on July 6.
BOE official Gertjan Vlieghe and Chief Economist Andy Haldane have signaled a willingness to look through above-target price growth, so that policy makers can focus on supporting demand. Vlieghe said that even before the referendum, he was concerned the economic outlook might not be strong enough to return inflation to the BOE’s 2 percent target “over a reasonable period of time.”
In contrast, policy maker Martin Weale on Monday pointed to improving wages and weak underlying productivity growth, saying they suggested that some inflationary pressures were starting to build before the referendum. “In the eyes of the Bank of England we would expect the short-term nature of this increase to be looked through,” said Victoria Clarke, an economist at Investec Securities in London. She sees it “focusing on the demand picture” and cutting interest rates by 25 basis points as part of a package of stimulus.