UK inflation edged higher in July as food shortages connected to Brexit and extreme weather events threaten further upside risks to the consumer price index.
The consumer price index (CPI) rose to 2.5% from 2.4% a month earlier. It was the first rise since November 2017, when inflation peaked at 3.1%.
Transport and computer games prices pushed inflation higher in July, while motor prices, clothing and footwear all fell, the Office of National Statistics figures revealed.
The removal of initial charges for investment in some unit trusts also played into the inflation figures.
Inflation risks from UK food shortages
The UK faces a “perfect storm” on food price inflation due to Brexit and recent extreme weather.
EY Item Club senior economist Howard Archer said food prices faced upside risk from the heatwave in the UK and Europe, which followed snow storms and poor weather in Q1.
Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond Fund, raised the same concerns, adding this looked set to be compounded by Brexit.
“The ‘Beast from the East’ has meant that many early UK crops have been decimated or failed completely, and more recently the very hot weather has hit fruit and vegetable crops as there has not been enough rain, which will hit yields and quality,” he said.
“There are widespread reports of UK farmers sending livestock to slaughter early because there has been no grass for the animals to graze on, and those that have kept livestock have had to use winter feed or buy additional feed to keep their animals alive.
“The UK seems to be facing something of a perfect storm when it comes to food prices – a terribly cold winter followed by a blistering summer, and no clarity on what tariffs will be applied – or how those tariffs will be enforced without creating major delays at transport gateways such as Dover – once we leave the EU.”
Bank of England hike long way off
The Bank of England will likely see the rise in the inflation rate as justification for its unanimous decision to raise interest rates at this month’s monetary policy committee meeting.
He said: “We expect inflation to hover around 2.5% over the next few months with upward pressure coming from recent higher oil prices and the weaker pound.
“We do not expect any more interest rates until after the UK leaves the EU in March 2019 given the major uncertainties that may occur in the run-up to the UK’s departure.”
Jonathan Chitty, investment analyst at Brown Shipley, said he is unsurprised markets do not expect another rate hike until Q3 2019.
“The Bank of England faces a difficult task in managing the need to promote economic growth against the backdrop of Brexit-based uncertainty with the requirement to keep inflation below 2%,” Chitty said.
He added interest rate changes take some time to affect consumer prices.
