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Brexit boost: UK sees largest yearly inflation rise since November 2014

Justin Tallis | AFP | Getty Images

Consumer prices in the U.K. saw their largest rise in July since November 2014, amid warnings that the country's vote to leave the EU could stoke inflation.

Consumer price inflation dropped 0.1 percent in July, according to official data, but saw a 0.6 percent rise compared to the same period last year, This was above analyst expectations for a 0.5 percent rise. Commuters will have to pay 1.9 percent more for rail fares from January, in line with the 1.9 percent retail price inflation reported on Tuesday.

The impact of the U.K. pound's post-referendum is already being felt, with petrol and food prices, which are more sensitive to currency movements, showing some of the strongest inflation rates.

"The U.K.'s strongly consumer-driven economic recovery is about to grind to a halt," Scott Corfe, director of the Centre for Economics and Business Research, warned in a statement.

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This will be the week when a raft of economic data indicate how the U.K.'s economy fared in July, the first month after it voted for Brexit. On Wednesday, we will find out unemployment data for July, followed by retail sales on Thursday and public finance data on Friday.

The inflation figures come as a growing number of economists are warning about the danger of complacency by the Bank of England (BOE)'s monetary policy committee (MPC). The MPC currently projects that inflation will take until the end of 2017 to exceed its 2 percent target, despite a dramatic decline in the value of sterling since the referendum.

"There was no obvious impact on today's consumer prices figures following the EU referendum results though the Producer Prices Index suggests the fall in the exchange rate is beginning to push up import prices faced by manufacturers," Mike Prestwood, head of prices at the Office for National Statistics, argued in a statement.

There has been a 12 percent trade-weighted decline in sterling since the referendum, according to Deutsche Bank calculations, which will have made imported goods more expensive for U.K. consumers, although it will also make U.K. exports cheaper. There is "early evidence that sterling's Brexit-driven depreciation already is pushing up inflation," according to Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.

The economy was a key battleground in the U.K.'s referendum, which delivered a surprise vote to leave the European Union despite grave warnings about the potential consequences for U.K. citizens' wallets.

Pressure on BOE?

Retail sales on Wednesday is the most important data point to watch for this week, according to currency analysts at Rabobank. There are a much wider range of forecasts for the sales, with economists surveyed by Bloomberg predicting anything from a 1 percent fall to a 1.2 percent rise in sales.

"The breath of this range is illustrative of the uncertainty that is shrouding the post referendum economy," according to Rabobank analysis.

Dissatisfaction with the labor market is believed to have been one of the factors which swung the result towards a leave vote, so unemployment data, which are predicted to show a 4.9 percent unemployment rate, will also be interesting for U.K.-watchers.

The BOE unveiled a radical new package of measures designed to combat the expected post-referendum slump earlier this month. A key part of the plan, buying up long-dated U.K. bonds (gilts), has already met with some problems. Last week, the BOE couldn't find enough sellers of long-dated gilts to meet its targets, possibly because many of these assets are held by pension funds and insurers.

Pension funds in particular seem eager to hold tight to their gilt stocks, as a safe haven back-up for their investments in a low interest rate world. A second attempt to buy gilts with more than 15 years maturity will be closely watched on Tuesday. If the BOE's efforts aren't viewed as a success, the pressure on the U.K. government to unveil its own major shift in policy will grow even greater.

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