UK's September inflation surge likely a taste of more to come

British inflation recorded its biggest jump in two years last month, setting the tone for a steep rise in prices over the coming year as sterling's post-Brexit plunge squeezes household finances.

Annual consumer price inflation rose to 1.0 percent in September from 0.6 percent in August - a leap not seen since June 2014, official figures showed on Tuesday. The rate of inflation was its highest since November that year.

There was no direct evidence that sterling's near 20 percent slide against the U.S. dollar since the referendum decision to leave the European Union was the driver of September's price jump, the Office for National Statistics said.

But economists said it would be a growing factor in the months ahead as the weaker pound pushes up the cost of imports.

"With wage growth more or less steady, the rise in inflation over the last year has already taken about a percentage point off real income growth," HSBC economist Liz Martins said.

More price rises will eat into the spending power of consumers who have so far proven resilient to the Brexit shock.

The Resolution Foundation think tank warned that Britons were likely to suffer a return to falling wages in real terms, something which blighted the economy in the years following the financial crisis until late 2014.

Sterling rose briefly against the dollar and British government bond prices fell after the stronger-than-expected figures which will further dampen expectations that the Bank of England will cut interest rates again this year.

Governor Mark Carney last week said the BoE could tolerate "a bit" of an overshoot against its 2 percent inflation target, to help accommodate economic growth and employment.

INFLATION WARNING SIGNS

The BoE said in August that inflation would hit its 2 percent target in around a year and then overshoot it for the next couple of years.

Many economists now expect sterling's latest fall could push inflation to around 3 percent and that, combined with signs that the economy did not suffer an immediate Brexit slump, is likely to put the BoE off a further rate cut this year. As recently as last month, the BoE said a rate cut was still likely.

"The bigger-than-expected drop in sterling has done a lot of the work for the Bank of England," said Berenberg Bank economist Kallum Pickering, adding that he only expected a rate cut if economic conditions deteriorate.

Most of the rise in inflation in September was due to the biggest monthly jump in clothing prices since 2010 and a rise in fuel costs, which had been falling a year earlier.

A pricing row last week between Britain's biggest retailer, Tesco, and consumer goods giant Unilever gave consumers a sign of how Brexit is likely to impact them, with suppliers and stockists battling for profit margins.

An ONS measure of inflation stripping out the prices of energy, food, alcohol and tobacco rose to 1.5 percent from 1.3 percent, above economists' expectations for 1.4 percent.

Factory gate prices increased by a stronger-than-expected 1.2 percent, the biggest increase in three years.