The higher cost of importing fuel, clothes and food pushed inflation back up to 2.9% in August, from 2.6% in July, equalling the four-year high struck in May this year.
The figure was higher than economists’ forecasts and sent the pound to its highest level against the dollar for a year, amid speculation that the Bank of England may be forced to raise interest rates sooner than expected.
Mike Prestwood, head of inflation at the Office for National Statistics, said: “Clothing prices rising faster than last year, along with a hike in the cost of petrol, helped nudge inflation upwards.
“Conversely, these effects were partially offset by air fares, which rose more slowly than during last year’s summer holidays.”
Sterling rose by just over a cent to hit $1.327 just after the figures were released. The pound was expected to remain at elevated levels until the central bank’s interest rate policy becomes clearer.
The City is waiting for Threadneedle Street’s monetary policy committee to indicate at its interest rate-setting meeting on Thursday whether it believes rising prices warrant an increase in the bank’s base rate.
Q&A
What is inflation and why does it matter?
Inflation is when prices rise. Deflation is the opposite – price decreases over time – but inflation is far more common.
If inflation is 10%, then a £50 pair of shoes will cost £55 in a year’s time and £60.50 a year after that.
Inflation eats away at the value of wages and savings – if you earn 10% on your savings but inflation is 10%, the real rate of interest on your pot is actually 0%.
A relatively new phenomenon, inflation has become a real worry for governments since the 1960s.
As a rule of thumb, times of high inflation are good for borrowers and bad for investors.
Mortgages are a good example of how borrowing can be advantageous – annual inflation of 10% over seven years halves the real value of a mortgage.
On the other hand, pensioners, who depend on a fixed income, watch the value of their assets erode.
The government’s preferred measure of inflation, and the one the Bank of England takes into account when setting interest rates, is the Consumer Prices Index (CPI).
The Retail Prices Index (RPI) is often used in wage negotiations.
Imports have risen steeply in price after the collapse in the pound following the Brexit vote, though the rising cost has taken longer to filter through to the high street than many analysts believed.
Clothing and footwear, most of which is imported, jumped in price by 4.6% year on year after a sharp rise in the price of women’s clothing pushed the average price up by 2.4% between July and August.
Fuel costs also rose with petrol prices jumping by 1.8 pence per litre.