12 August 2003, 14:32  UK inflation surprises with rise in July

LONDON, Aug 12 - Britain's inflation rate rose unexpectedly in July boosted by clothing and footwear prices after retailers enjoyed bumper sales in the month before, official data showed on Tuesday. The Office for National Statistics said retail prices excluding the cost of home loans (RPIX), fell 0.1 percent in July bringing the annual rate up to 2.9 percent from 2.8 percent. Analysts had forecast a small decline in the annual rate. Interest rate futures and gilts immediately fell back as expectations firmed that the next move in interest rates will be up. Many analysts had believed that inflation had peaked and was heading toward the Bank of England's target rate of 2.5 percent which it has now topped for nine months in a row.
"These numbers come as quite a shock as we had been looking for a fall in inflation," said Simon Rubinsohn, chief economist at brokers Gerrard. The BoE received an advance copy of the latest data last Wednesday evening, before it made its decision to keep interest rates at a 48-year low of 3.5 percent. It will present its quarterly outlook for inflation on Wednesday. The BoE is expected to cut its growth forecast for the UK economy. However most analysts see interest rates at best on hold with futures markets pricing in a rise by the end of the year, driven by strong consumer spending figures and signs that even the long-suffering manufacturing sector may be turning round.
HICP
The Harmonised Index of Consumer Prices, which the government plans to target from November, was up 1.3 percent on the year compared with analysts forecasts of a fall to 1.0 percent. The likely target for HICP, however, will be 2.0 percent. The all items inflation rate, RPI, stood at 3.1 percent on the year, its highest level since May. The ONS said the largest upward effect on inflation came from clothing and footwear prices, especially women's outerwear, as there was less summer discounting than usual. This was perhaps in response to exceptionally strong sales growth in June when the hot weather boosted demand for new summer lines. Another large upward effect came from travel costs as the ONS included for the first time a new index for airfares which picked up the normal summer price hikes.
The largest downward effect came from alcoholic drinks and there was a further negative contribution from house prices as they rose less than they did a year ago.//

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