Inflation rose to the highest level in 20 months in July, with the consumer prices index ticking up to 0.6% last month from 0.5% in June, according to the Office for National Statistics.
City economists warned of steeper prices rises in the coming months as the full impact of the weaker pound following the Brexit vote is felt.
It was the highest rate of annual inflation since November 2014, and the first official snapshot of what has happened to prices since the EU referendum on 23 June. The pound has fallen by about 10% against the dollar since the vote, pushing up the price of imports.
The main drivers of the Julyincrease in inflation were rising fuel and alcohol prices, and higher restaurant and hotel bills. Food prices also fell at a slower rate than a year ago.
Victoria Clarke, an economist at Investec, said inflation was likely to rise to the Bank of England’s 2% target by the end of 2016, reaching almost 3% in May 2017. The last time inflation was as high as 2% was December 2013.
Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said the pound’s weakness was already reflected in the pickup in inflation in July.
“Inflation’s pickup, however, will gain strong momentum in 2017,” he said.
The consumer prices index (CPI) is the official measure of UK inflation and provides a monthly snapshot of the price movements of an average basket of goods and services.
The ONS revises what goes into the basket once a year to make it as representative as possible of the latest consumer shopping trends. At the time of the last revision in March, items including pouches of microwave rice and computer game downloads were included, while cooked sliced turkey, CD-Roms and nightclub entry were out.
The retail price index (RPI), which includes the cost of housing and is calculated differently from CPI, rose to 1.9% from 1.6%. The spike will affect rail commuters, because July’s RPI figure is used to set rail fares from January.
In further evidence of the effect the Brexit vote has had on imports, the prices UK industries pay for their raw materials and fuel jumped by 4.3% in the year to July, compared with a 0.5% fall in the year to June.