The pound sterling surged by 1 percent on Tuesday to a its highest level in a year against the US dollar after the Office for National Statistics (ONS) revealed that UK inflation increased to one of its highest levels in five years.
Inflation in August rose by more-than-expected to 2.9%, up from 2.6% in July and above the central bank’s target of 2% inflation, as British households paid more for clothing and fuel. The rate for clothing and footwear was 4.6% in August.
The ONS said that the depreciation of sterling seen in 2016, particularly following the outcome of the EU referendum, has continued to be a major driver in ramping up prices.
The rebound in oil prices also contributed, increasing fuel costs.
CPI: Detailed figures by divisions, groups and classes:
|Year over year change August 2017|
|CPI (overall index)||2.9%|
|Food and non-alcoholic beverages||2.1%|
|Alcoholic beverages and tobacco||4.5%|
|Clothing and footwear||4.6%|
|Housing, water, electricity, gas and other fuels||2.2%|
|Furniture, household equipment and maintenance||4.2%|
|Recreation and culture||1.8%|
|Restaurants and hotels||3.5%|
|Miscellaneous goods and services||1.9%|
The news pushed the sterling above $1.3280 against the dollar to its best level since last September.
The inflation report has renewed expectations that Bank of England policymakers will be more willing to hike interest rates sooner. The Bank of England is set to make an announcement on interest rates on Thursday.
Ben Lord, manager of the M&G UK Inflation Linked Corporate Fund, was quoted by The Telegraph as saying:
“The risks of a 6-3 vote at the next monetary policy meeting have risen materially on the back of this number, as Andy Haldane has been pretty explicit on his discomfort with present levels of inflation, even if they are due to currency weakness and imports.”
However, Paul Hollingsworth, UK economist at Capital Economics, told the BBC that although the fresh ONS data will provide “further ammunition” to members of the Bank’s rate-setting Monetary Policy Committee in favour of an earlier rise in interest rates, “we don’t think the rise in CPI inflation has much further to run,” he said.
“Indeed, we expect it to peak at 3.1% in October, before dropping back next year as the impact of the pound’s fall starts to fade,” Hollingsworth added.