Thursday, 16 August, 2018

Sterling surges after jump in United Kingdom inflation

British inflation jumps pushing pound to one-year dollar high Sterling surges after jump in United Kingdom inflation
Nellie Chapman | 12 September, 2017, 13:55

United Kingdom inflation measured by the Consumer Prices Index rose to 2.9 percent in August, according to statistics from the Office for National Statistics released on Tuesday, up from 2.6 percent in July.

Inflation hit 2.9% in August, matching May's four-year high, according to official statistics.

United Kingdom inflation is surging even more than expected, official consumer price data revealed on Tuesday, adding to pressure on the Bank of England to adjust monetary policy. "Labour costs are the main factor in domestic inflation, and growth here remains below long-term averages".

Economists in the Reuters poll had expected growth of 3.1 percent.

The ONS said excluding oil prices and other volatile components such as food, core consumer price inflation rose by 2.7 percent, stronger than economists' expectations of 2.5 percent. The fall in sterling following the U.K.'s vote to leave the European Union has pushed up the cost of imports, making goods more expensive for British consumers. It now expects the United Kingdom economy to grow at a rate of 1.7 percent in 2017, down from 1.9 percent previously, and 1.6 percent in 2018, down from 1.7 percent. However, policymakers are expected to keep the bank's benchmark interest rate at the record low of 0.25 percent at their meeting on Thursday.

A broader calculation of the CPI, which includes housing costs, also rose at a faster pace in August than July.

"Our view is that United Kingdom monetary policy will remain unchanged again this month, although the risk is the MPC sounds increasingly uncomfortable about a sleepy market attitude to interest rates", Deutsche Bank economists Mark Wall and Oliver Harvey said in a note on Tuesday.

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.

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

Two members of the Bank's Monetary Policy Committee are already voting for higher rates.

Brettell added that beyond the currency effect there appear to be few underlying inflationary pressures.

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.