Inflation at 20-month high as low sterling pushes up prices

Consumer prices increased by 0.6pc over the last 12 months, up from 0.5pc in June and hitting the highest level since November 2014, according to the Office for National Statistics.

Rising fuel prices were a key factor behind the increase, as oil is traded in dollars on global markets. When the pound slumped, petrol prices rose by 0.8p per litre to an average forecourt level of 111.8p in the month and the price of diesel climbed 0.9p to 113p per litre, reports The Telegraph.

That means fuel costs rose 0.7 per cent even as the global oil price declined, indicating the powerful impact of the weaker pound.

Alcohol prices also increased – a 2.3 per cent rise in the cost of spirits on the month bucked a previous trend of falling prices.

Tobacco, which is entirely imported, increased by 0.1 per cent on the month and 4.9 per cent over the past year.

Food prices, however, continued to fall as the price war between competing supermarkets continues to rage.

Overall food prices are down 2.7 per cent over the past year, although the monthly pace of the fall fell from 0.7 per cent in June to 0.2 per cent in July.

Meat is 5.7 per cent cheaper than it was a year ago, while vegetable prices are down 3.8 per cent over the past 12 months.

Home rental costs also slowed sharply, rising just 0.1pc on the month and 1.3 per cent on the year – the smallest annual rise in six years.

Economists believe the lower pound will put sustained upward pressure on prices, outweighing the negative impact of any slow down in economic growth post-referendum.

“Looking ahead, CPI inflation likely will exceed 1pc by November, as the anniversary of sharp falls in commodity prices is reached and sterling’s decline continues to push up food prices,” said Samuel Tombs at Pantheon Macroeconomics.

He believes inflation will hit 3pc in late 2017 and that this might stop the Bank of England from pumping more money into the economy.

“Given the extent to which inflation likely will overshoot the 2 per cent target, we think the Monetary Policy Committee will hold back from additional government bond purchases next year once the current £60bn tranche has been completed,” said Mr Tombs.