Published: Tue, September 12, 2017
Money | By Armando Alvarado

GBP Rallies as UK Inflation Rises More Than Expected

GBP Rallies as UK Inflation Rises More Than Expected

Policymakers are anxious inflation could surge too far above the official target of two per cent. Economists had expected the figure to rise to 2.8 per cent.

The fall in the value of sterling since the European Union referendum continued to be the main impetus for rising prices, the Office for National Statistics said.

Core CPI inflation, which excludes more volatile prices since as for food and fuel, was up 2.7% from 2.4% a month earlier versus the consensus estimate of 2.5%.

The average United Kingdom house price was GBP226,000 in July, which was GBP11,000 higher than in the same month of the prior year and GBP2,000 higher than last month.

However markets are likely to be more focused on the accompanying wage data as economists forecast that average earnings will have risen from 2.1% to 2.3% over the same period, alleviating some of the pressures of soaring inflation on United Kingdom consumers.

Short sterling interest rate futures inched downwards, pricing in a marginally higher outlook for Bank of England rates, while London's FTSE 100 fell slightly as the gains for the pound weighed on the index's mainly foreign-earning constituents.

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Sterling jumped on Tuesday after United Kingdom inflation rose to its equal highest in more than five years, adding pressure on the Bank of England to do more to support the currency.

The higher-than-predicted figure could meanwhile put pressure on the Bank of England to raise its key interest rate from a record-low level sooner than expected, although it is not forecast to make any change at Thursday's regular policy meeting.

Paul Hollingsworth at Capital Economics said he thought inflation is now close to its eventual peak but agreed that the figures "are likely to provide further ammunition to the more hawkish members of the MPC" but felt it would only result in a split vote, as seen several times this year. Such statements have been prominent in the committee's last two Inflation Reports. Leila Butt, a senior economist with Prudential, said a risk remains of inflation expectations becoming entrenched.

The weaker level of the pound was behind the continued rise in clothing prices, as it's become more expensive for importers to bring clothing to the United Kingdom from overseas.

"Rising prices for clothing and motor fuels were the main contributors to the increase in the rate between July and August", the ONS said.

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