UK Inflation Provides an Upside Surprise

Data has shown that the UK headline inflation figure has risen to 4.5%. Expectations of a higher figure had already been priced in over the morning, reports foreign exchange (FX) specialist Caxton FX. The previous figure showed that prices had increased by 4.0% from the same point last year, and this latest monthly rise is in line with strong global price pressures. As the highest UK inflationary figure rise since 2008, the increase is well ahead of the forecasted 4.2% rise.

Richard Driver, analyst for Caxton FX, said: “This really goes to show last month’s ease in price pressures was very much down to temporary factors. Fuel prices and the VAT rise are definitely taken their toll on UK inflation. The market had a BoE [Bank of England] rate rise priced in for December 2011, and this data could well bring some of those bets forward. [Mervyn] King has recently indicated that UK headline inflation could hit 5.0% in the coming months, a figure which could well force the MPC [Monetary Policy Committee] to succumb to pressure to raise rates.”

The markets responded quickly to the report, as Driver concluded: “Sterling spiked in the build-up to the data release, but how far it can push on from here in light of the upside surprise remains to be seen; we have been well-warned that UK inflation is going to climb quite aggressively. Despite this data, there is still a need for much stronger UK growth before the BoE tightens policy. I still think a BoE rate rise before December could be disastrous.”


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