U.K. Inflation Hits Five-Year High -- 2nd Update

Consumer prices in the U.K. rose in September at the fastest annual rate for more than five years, a pickup that will reinforce expectations the Bank of England could nudge up interest rates as soon as November.

Annual inflation in the U.K. accelerated to 3% in September, the Office for National Statistics said Tuesday, the fastest pace of growth in prices for goods and services since early 2012.

Consumer prices have now been rising in excess of the Bank of England's 2% target for eight straight months. The BOE's Monetary Policy Committee has repeatedly signaled it expects to raise borrowing costs soon to rein in inflation, despite signs the economy is slowing as consumers pare back spending and Britain's decision to exit from the European Union weighs on investment.

BOE Gov. Mark Carney, in testimony to lawmakers Tuesday, said he expects inflation to rise further above target in October, requiring him to publicly explain the overshoot to Treasury chief Philip Hammond, Chancellor of the Exchequer.

"I think it's more likely than not that I will be writing on behalf of the MPC a letter to the Chancellor," he said.

Most economists expect the BOE to raise its benchmark interest rate to 0.5% in November, from 0.25%. A quarter-point rise would mark the first time the U.K. central bank has increased interest rates in a decade. Officials led by Mr. Carney say they expect future increases in borrowing costs to be limited and gradual.

The BOE's shift in stance comes as major central banks step back from the easy-money policies they have pursued for years in an effort to revive economies scarred by the financial crisis that tipped the world into recession in 2009.

In the U.S., the Federal Reserve has begun shrinking its huge portfolio of assets and officials are expected to raise short-term rates again in December. The European Central Bank is expected to say later in October that it will begin dialing back the pace of its own asset-buying program.

Whereas the Fed and the ECB are responding to buoyant growth and stirring, if subdued, inflation, the BOE is confronting a different challenge, of high inflation and weakening growth.

Inflation in Britain has accelerated following a fall in the pound after last year's Brexit vote. At the same time, unemployment has declined to a 40-year low, eating up the labor-market slack that would normally restrain domestic cost pressures.

In response, the BOE said in September that a majority of officials expect to raise their benchmark interest rate "within months."

In testimony to lawmakers Tuesday, a newly appointed deputy governor made it clear he wasn't part of that majority and still saw room for the economy to grow without generating too much inflation.

"My view is that we are approaching a tipping point at which it would be necessary or justified to remove some of that stimulus," MPC member Silvana Tenreyro said Tuesday, who also gave evidence to Parliament Tuesday.

But a newly appointed deputy governor made it clear he wasn't part of that majority and still saw room for the economy to grow without generating too much inflation.

"I still think there is some slack in the economy, not a lot, but still some," said David Ramsden, who is responsible for banking and markets and joined the BOE in September after a long career in government.

Policy makers fret the economy will struggle to expand without stoking inflation as long as uncertainty surrounds the U.K.'s future ties to the EU. Prime Minister Theresa May dined Monday with European Commission President Jean-Claude Juncker in an effort to spur faster progress in divorce talks between London and Brussels.

"Were developments in negotiations to give confidence that a deal could be struck and a disorderly exit avoided, it could buttress demand in the economy," Mr. Ramsden told lawmakers.

The ONS said Tuesday that September's acceleration in inflation was driven largely by higher food prices than a year earlier. Transport costs, especially airfares, also pushed up the annual rate, the agency said.

-- Paul Hannon contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com and Wiktor Szary at Wiktor.Szary@wsj.com

(END) Dow Jones Newswires

October 17, 2017 08:10 ET (12:10 GMT)