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UK inflation rises to 2.9% thanks to sterling slump

CONTRIBUTOR: The biggest contributor to the change in the August inflation rate was from clothing and footwear costs Photo credit: AFP/Getty Images

INFLATION ROSE unexpectedly to 2.9 per cent in August, as the slump in sterling since the Brexit vote continued to have a powerful impact on domestic UK prices.

The reading was up from 2.6 per cent in July and outstripped expectations of City of London analysts of a 2.8 per cent print from the Office for National Statistics.

It matched the reading from May, which was itself the highest since June 2013.

Core inflation - which strips out volatile energy and food prices - jumped 2.7 per cent, up from 2.4 per cent previously.

The news sent the value of sterling up 0.67 per cent on the day to $1.3248, the highest since September 2016, as traders bet on an earlier interest rate rise from the Bank of England.

The Bank is due to vote again on rates on Thursday and members of the nine-person Monetary Policy Committee have warned that that their tolerance for higher inflation, despite the weakness of the overall economy, is limited.

Regarding today’s inflation figures, Paresh Davdra, CEO and Co-Founder of RationalFX commented: “Data released this morning has shown that UK inflation has risen to 2.9%. Analysts were caught off guard by the highest rate of inflation since May, as UK consumer households feel the impact of a weaker pound and slow wage growth.

The pound was boosted to a one year high against the dollar on the back of the data release. It also gained against the euro, following a strong start to the day against its peers ahead of the release of figures.

Sterling’s gains in response to the higher than forecast inflation figures gives a clear indication of investor hopes ahead of Thursday’s BoE meeting. Analysts will be hoping that the inflation figures will embolden hawkish voices within the MPC and increase pressure on the bank to raise interest rates sooner than later.

The next few days will be key for the currency as investors anticipate the possibility of another split within the BoE which could strengthen the case for a rate rise. However it still remains to be seen if the dovish majority at the BoE can be persuaded that the latest rise in inflation necessitates a more hawkish policy.”

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