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Pound hits one-year high as UK inflation rate jumps to 2.9% - as it happened

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British households face a cost of living squeeze after inflation jumped in August, driven by more expensive clothing

Earlier:

 Updated 
Tue 12 Sep 2017 10.53 EDTFirst published on Tue 12 Sep 2017 03.09 EDT
A rack of clothes.
Clothing prices jumped by 2.4% in August, pushing the UK inflation rate up Photograph: Alamy Stock Photo
Clothing prices jumped by 2.4% in August, pushing the UK inflation rate up Photograph: Alamy Stock Photo

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Key events

Afternoon summary

Right, time for a recap.

The cost of living squeeze in Britain just became more uncomfortable, after inflation unexpectedly rose in August.

The consumer prices index spiked to 2.9% in last month, from 2.6%, equalling May’s four-year high. Shoppers suffered a big jump in clothing prices, particularly for womenswear, plus pricier petrol at the pumps.

Economists blamed the weak pound, which has made imports pricier.

Core inflation rose to 2.7%, its highest level since 2011, putting more pressure on the Bank of England to consider an interest rate hike.

Speculation that the BoE could raise borrowing costs sent the pound soaring. It’s currently trading at a one-year high against the US dollar, at $1.327, and a six-week high against the euro at €1.11.

As this chat from the Bond Vigilantes team at M&G shows, inflation is almost a whole percentage point over the BoE’s 2% target.

New post: CPI now 2.9% up from 2.6% last month, above expectations and overshooting the Bank of England forecast https://t.co/ejwJSznzqB pic.twitter.com/JtxzzkpxvA

— Bond Vigilantes (@bondvigilantes) September 12, 2017

Unions have renewed their calls for the public sector pay cap to be abolished for all workers; otherwise staff such as nurses and teachers will continue to suffer a significant real wage cut.

The public sector pay squeeze
The public sector pay squeeze

The jump in the pound pulled shares down in London (as it could hurt exporters). But other markets have continued to rally, sending global markets to their highest ever levels.

Connor Campbell of SpreadEx says:

The markets remained dominated by the reaction to the morning’s UK inflation reading, with a bit of North Korea/Hurricane Irma relief thrown in for good measure.

That relief has sent the MSCI All Country World Index to a new alltime high this afternoon.

Here’s our latest inflation news story:

And that’s all for today. Thanks for reading and commenting. GW

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Newsflash: Britain’s next budget will be delivered on 22nd November.

This will be chancellor Philip Hammond’s opportunity to announce new tax and spending plans, perhaps tear up the public sector pay cap, and try to guide the economy through the Brexit process.

Today I’m announcing the date of the next Budget. Watch as I explain why it’s one of the most important days of the parliamentary calendar. pic.twitter.com/svSK4uK0S0

— Philip Hammond (@PhilipHammondUK) September 12, 2017
Phillip Inman
Phillip Inman

It’s worth noting, though, that police and prison staff only make up 6% of the total public sector work force.

Plus, the pay increases announced today are unfunded, so savings or cuts must be made elsewhere to pay for them.

Here’s another depressing, and informative, chart from the Resolution Foundation, showing how public sector workers have suffered falling real wages for much of the last decade.

The pay squeeze goes on
The pay squeeze goes on Photograph: Resolution Foundation

In the last hour, the government has announced that the 1% pay cap will be lifted for the police and prison workers. They’ll get pay rises of 2% and 1% respectively -- still not enough to keep up with inflation.

Trade unions have already warned that it’s not enough.

Depressingly, the rise in UK inflation will fall particularly hard on poorer families.

That’s because they spend a greater proportion of their income on food, clothes and housing, where prices have risen above average this year.

Stephen Clarke of the Resolution Foundation has tweeted the details:

This means that lower income families will be hit hardest. Poorest fifth of hhs saw change in CPIH of 0.94 compared to 0.64 for richest. pic.twitter.com/yeeR3AML1T

— Stephen Clarke (@stephenlclarke) September 12, 2017

Inflation back up to 2.7 (CPIH) and 2.9 (CPI). Summer lull in price rises is over. pic.twitter.com/bgxwfxin43

— Stephen Clarke (@stephenlclarke) September 12, 2017

Fox's Sky bid faces broadcasting standards scrutiny

Important media news: Rupert Murdoch’s attempt to take control of Sky has hit a potentially serious hurdle.

Culture secretary Karen Bradley has just announced that she’s ‘minded’ to refer the bid to the competition authorities on the grounds of broadcasting standards (basically, whether Fox is a fit owner).

That’s a new development; Bradley is also planning to refer the bid on the grounds of media plurality.

Here’s the full story:

Sky’s shares have fallen by almost 3%, to their lowest level since Murdoch made his bid last December, as traders digest this new development.

Sky’s share price over the last 12 months. Photograph: Thomson Reuters

What should the Bank of England do?

Today’s inflation figures will be high on the agenda when the Bank of England meets later this week to set interest rates.

Last month, the MPC voted 6-2 to leave borrowing costs unchanged, with the majority judging that the economy was too weak to justify a hike.

On Thursday, the committee will be up to full strength of nine policymakers as new deputy governor Dave Ramsden joins the throng. So could policymakers decide ‘enough is enough!’ and raise interest rates from their record low of 0.25%?

City experts are divided on this issue.

Emanuele Canegrati of BlackPearlFX argues that the BoE should use the levers of monetary policy to get inflation down to its 2% target, and ease the cost of living squeeze.

After latest data on UK #inflation #BOE has no more room to avoid a shrinkage in monetary policy stance @BlackPearlFX

— emanuele canegrati (@ECanegrati) September 12, 2017

#BOE has to hike rates. Otherwise British households will feel the heat soon.

— emanuele canegrati (@ECanegrati) September 12, 2017

Ben Lord of M&G predicts that the Bank’s chief economist, Andy Haldane, will vote for a rate hike on Thursday, resulting in a 6-3 split but no rate rise.

Lord believes that the Bank should sit tight, as inflation may peak soon.

“Increased disagreement on the MPC will likely lead to some sterling strength, in the short term at least...

But if we are a month or so away from peak inflation, to hike rates and strengthen the pound....would be overly myopic and pro-cyclical in my view.

Kathleen Brooks of City Index points out that the City believes there is a greater chance of a rate rise before Christmas.

The Overnight Index Swaps market has already rushed to price in a greater probability of a rate hike from the BOE by year end. The market now expects a 30% chance of a hike in December, this compares with 20% a week ago.

Pound hits six-week high against the euro

It’s too late for most British holidaymakers, but the pound is rallying against the euro this morning, as well as the dollar,

Sterling has gained 1% against the European single currency to €1.112, the highest level since the start of August.

That means one euro is worth 89.9p, having hit 93p at the end of last month.

London hit by house price slowdown

We also have fresh evidence that the housing boom in Britain’s capital is faltering.

London house prices rose by just 2.8% in the 12 months to July 2017, much slower than the national average of 5.1%.

Indeed, that makes the London the slowest region in England.

House price slowdown? Depends where you live. Prices barely rising in London, but still motoring in Midlands and SW: pic.twitter.com/K5D14BVzYC

— Samuel Tombs (@samueltombs) September 12, 2017

London continues to be the region with the highest average house price at £489,000, followed by the South East, at £321,000, and the East of England, at £290,000 respectively.

Public sector workers will see their real wages shrink by around 2% this year, unless the pay cap is dropped.

Liberal Democrat leader Vince Cable says Theresa May’s government needs to act urgently:

“Rising inflation shows how urgent it is to address the sense of unfairness around the pay cap.

“With these numbers our nurses, teachers and other public sector workers will experience a 2% pay cut in the coming year. This will only aggravate the recruitment and retention crisis we are facing.

“The government must take urgent steps to lift the pay cap for all public sector workers, and increase wages in line with inflation.”

Andrew Sentance of PwC (and a former Bank of England interest-rate setter) fears that inflation will keep rising as the full impact of the weak pound ripples through the economy.

He predicts that the consumer prices index will rise over 3% later this year, weakening growth.

With very well-developed and complex supply chains, it can take a number of years for a decline in the exchange rate, which raises import prices, to feed through fully to consumers.

“This suggests that the recent squeeze on consumer spending from higher inflation will continue to dampen growth in the UK economy in the second half of this year and next year. There is not much sign yet that consumers will get any early relief from the surge in inflation following the Brexit vote last summer.”

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The pound has now clawed back half of the losses suffered after the Brexit vote, but is still worth 10% less than in June 2016.

Sterling hits 1-year high v dollar of $1.3250.
It's now -10% since Brexit vote ... and +10% from post-Brexit (and 31-year) low in January. pic.twitter.com/5mn6cQcsgO

— Jamie McGeever (@ReutersJamie) September 12, 2017

Britain is now suffering its SECOND cost of living squeeze in a decade.

As thus chart shows, inflation (in pink) outpaced wage growth once the financial crisis began in 2008. Real wages didn’t turn positive until 2014, but have been shrinking since early 2017.

UK consumer price inflation has picked up to 2.9%. The squeeze on living standards persists as pay growth struggles to keep up. pic.twitter.com/vvZAp8kK7Z

— Scott Corfe (@ScottCorfe) September 12, 2017

The Treasury have sent a comment over, but it doesn’t reveal whether the public sector pay cap is being axed....

‘We know some families have concerns with their day to day cost of living.

That’s why we are boosting take home pay with tax cuts for over 30 million people and a National Living Wage that is giving the lowest earners their fastest pay rise for 20 years.’

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