British Pound strengthens as inflation rises in July

Consumer Price Index (CPI) indicates July inflation rise in the UK by 0.1 per cent with strengthening of the Pound Sterling, allaying fears that the country was in danger of slipping into deflation.

The unexpected result has caused further pressure on the Bank of England to confirm when interest rates will be raised, given that they have been held at 0.5 per cent for the past 78 months. Inflation first reached zero per cent in February. The Bank of England now expects it to remain close to zero for the coming months, before rising to around 0.5 per cent at the end of the year.

Partly on the strength of inflation, the pound hit a seven-week high against the dollar, making a pound worth $1.57.

Writing in the Telegraph, Kirsten Forbes, a member of the Bank of England’s Monetary Policy Committee, said: “Waiting too long would risk undermining the recovery - especially if interest rates then need to be increased faster than the gradual path which we expect.”

However, governor Mark Carney has suggested that the decision on when to raise interest rates will not be taken until the end of this year.

According to the Office for National Statistics (ONS), the main factor that has contributed to last month’s inflation is the rising cost of clothing, particularly shops’ reluctance to make deep discounts during the traditional summer sales. However, the ONS said that this was partially cancelled out by the falling prices of food and oil, which is down 50 per cent on the same time last year. Despite low fuel costs, air travel is now more expensive.

However, the Retail Price Index has remained steady at one per cent, which will be used to determine rail fare increases, among other price-setting tasks. Core inflation (which excludes food and energy prices, as these are deemed to be volatile markets) has also risen from 0.8 per cent to 1.2 per cent over the course of June, reaching its highest level for five months.