Consumer prices rose back to their highest levels of the year in August as the weak pound took a firmer grip on the costs of imported goods, data from the Office of National Statistics showed on Tuesday.
Prices in all broad categories were in August 2017 than a year ago, the data showed, and there were rises in all measures of inflation, including producer input prices, showing inflationary pressures continue to build.
Furthermore, producer output prices – also known as factory gate inflation – rose to the highest level since May, putting pressure on manufacturers to raise their prices.
Consumer price index (CPI)
Headline consumer inflation rose back to its high for the year in August to an annual rate of 2.9% from 2.6% in July and surpassing forecasts of 2.8% as housing, transport costs and leisure items took the biggest tolls.
Meanwhile acceleration in clothing and footwear prices at 4.6% was the largest seen in the core index of consumer prices since its introduction in 2006.
The report said: "The rise in inflation in this category may reflect changes in the exchange rate impacting on the cost of imported clothing since clothing and footwear is one of the most import-intensive categories."
Retail price inflation, which is rarely used as an official measure of price rises, rose to an annual rate of 3.9% from 3.6%.
Producer price inflation (PPI)
Input prices – the costs of energy and materials that go into the production of goods made in the UK – rose at 7.6% in August, up from 6.2% in July, but still a long way of this year's peak of 19.9% in January.
Output prices, the so-called factory gate inflation that is the cost of manufactured goods before profit mark-up is added, rose to 3.4% annually in August from 3.2% in July.
Together, the CPI and PPI data suggested that manufacturers were beginning to find it necessary to start passing on the higher costs of production to the consumer.
Producer input prices were lifted by the weak pound as the import of raw materials and fuel are more costly with a weak exchange rate. This also pushed up consumer prices for imported retail goods.
Sterling has lost 8.3% versus the dollar since the UK voted to leave the European Union in June last year and is nearly 15% lower against the euro over the same period.
"The jump in CPI inflation in August largely was driven by retailers pushing through big price rises in response to sterling’s depreciation," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Squeeze on household budgets continues
Economists continued to doubt the Bank of England would be moved to lift rates this year, despite the gap between annual wage increases and consumer inflation that has put pressure on consumer spending this year. Data on wage growth is published on Wednesday.
"Tomorrow sees the release of the UK labour report and it is expected to show a modest increase in wage growth and ongoing decent gains in employment, despite Brexit uncertainty," said James Knightley, chief international economist at ING.
"Consequently, the BoE is likely to remain concerned that financial markets are mispricing the risk of an interest rate rise."
Sterling gained 0.7% against the euro on Tuesday morning to €1.1091 and was up 0.7% versus the dollar at $1.3252.
The benchmark 10-year Gilt yield rose 1 basis point to 1.06%, while the 2-year yield was also 1bp higher at 0.23%.
On the stock market, the FTSE 100 slipped 0.2% to 7,402.