UK inflation renews talk of interest rate increase

Inflation in Britain spiked up to 2.9 percent in the year to August, official figures showed yesterday, in a development that has stoked speculation the Bank of England may raise interest rates sooner than expected regardless of how the country's Brexit discussions shape up.

The Office for National Statistics said the increase from the previous month's 2.6 percent rate was largely due to rising prices for clothing and motor fuels. The scale of the increase, which took the consumer price inflation rate to its joint-highest level in more than five years, was unexpected - the consensus in the markets was for a 2.8 percent rate.

The pound jumped to near year-highs against the dollar, a signal that some traders, at least, think that borrowing rates could be heading higher later this year or early next. The pound was up 0.8 percent at $1.3261 in early afternoon in London. The pound was also strengthening against the euro, which was down 0.9 percent at 0.8991 pound.

Inflation is now well above the Bank of England's target of 2 percent. In more normal times, that fact alone would have been enough for the central bank to raise interest rates, which can rein in economic activity, thereby keeping a lid on price increases.

If inflation ends up being more than 1 percentage point above the target, Bank of England Governor Mark Carney will have to write a letter to the government explaining why that's happened and what he and his central bank colleagues are planning to do about it.

While inflation has risen sharply in the past year largely on the back of the pound's fall since Britain's vote to leave the European Union, the economy has slowed sharply as living standards have been squeezed by higher prices. Also, businesses are increasingly reluctant to invest as they gauge the progress of the Brexit discussions and what Britain's future relationship with the EU will look like. So far, little progress has been made and there are fears that the country will crash out of the EU in March 2019 without a new deal, which could mean tariffs on British goods and other impediments to trade.