British inflation at 5-1/2-year high in September, rate hike on track

LONDON (Reuters) - British inflation rose to its highest level in more than five years in September, official data showed on Tuesday, adding to the likelihood that the Bank of England will raise interest rates next month.

Consumer prices last month were 3.0 percent higher than a year ago, the Office for National Statistics said, matching economists’ average expectation in a Reuters poll and marking the fastest rise since April 2012.

Rising inflation - driven largely by the pound’s fall since last year’s vote to leave the European Union - has squeezed household incomes, causing broader economic growth to slow.

Wages have failed to keep pace with the rising cost of living.

Nonetheless, last month the Bank said it expected to raise interest rates in the coming months if the economy and price pressures continued to strengthen.

“Today’s release has all but rubber stamped a rate hike from the central bank at their next meeting,” said David Cheetham, chief market analyst at retail forex broker XTB.

Sterling dipped initially against the dollar after the data but soon recovered, while stocks were mostly unchanged. [GBP/]

A majority of economists polled by Reuters think the Bank will move at its next meeting in November - but most also said it would be a mistake to act now. [BOE/INT]

New Bank of England Deputy Governor Dave Ramsden said on Tuesday that domestic price pressures remain below the kind of levels that would pose a threat to the central bank’s inflation target. This implies the inflation is imported.

Last month the Bank said it expected inflation to exceed 3 percent in October, higher than it had forecast just a month before, when it predicted it would take more than three years for inflation to return to its 2 percent target.

Although much of the effect of the pound’s decline has already been felt by consumers, some retailers are only now starting to pass on price rises.

On Monday, furniture retailer IKEA Group said it had increased prices in Britain by 3 percent to compensate for the slump in sterling.

The pound has fallen around 12 percent since the referendum against a trade-weighted basket of major currencies such as the U.S. dollar and the euro =GBP.

Food and transport costs helped to push up inflation in September, the ONS said.

Core consumer price inflation - which strips out changes in the typically volatile prices of energy, food, alcohol and tobacco - was steady at 2.7 percent, as expected in the Reuters poll.

The ONS also released figures for house prices in August, which showed an 5.0 percent annual rise across the United Kingdom as a whole compared with a 4.5 percent increase in July. Prices in London alone rose 2.6 percent.

Reporting by Andy Bruce and Alistair Smout Editing by Jeremy Gaunt