Sterling boosted by news of UK inflation surge in September

British inflation recorded its sharpest jump in more than two years in September, even without any direct evidence of the weaker pound pushing up prices, official figures showed on Tuesday.

Annual consumer price inflation rose to 1.0 per cent from 0.6 per cent in August, the highest level since November 2014 and the biggest jump from one month to the next since June 2014, the Office for National Statistics (ONS) said.

The news dampened expectations of another interest rate cut by the Bank of England this year and in turn this led to a rise in the value of sterling. By lunchtime it had dropped to 89.5p to the euro, from 90.2p at this morning’s opening.

Political factors are also driving sterling. Lawyer James Eadie, representing the government in a High Court challenge over who has the right to trigger divorce talks, sent the pound briefly to $1.23 by saying parliament would “very likely” have to ratify any Brexit deal with the European Union. It later drifted back to $1.2278, still well up on the day.

Broader increase

On the inflation figures, economists polled by Reuters had expected a reading of 0.9 per cent, and Tuesday’s figure was at the top end of the range of forecasts. They are likely to view September’s rise as only the start of a much broader increase, fuelled by the pound’s near 20 per cent plunge since June’s vote to leave the European Union.

Still, official statisticians were waiting for clear signs of an impact from the weakened currency. Most of the rise in inflation in September was due to the biggest monthly jump in clothing prices since 2010 and a rise in fuel costs, which had been falling a year earlier.

“There is no explicit evidence the lower pound is pushing up the prices of everyday consumer goods,” said Mike Prestwood, head of inflation at the ONS.

Looking at the three months to September as a whole, prices were up 0.7 per cent on a year earlier compared with the Bank of England’s forecast for inflation to average 0.76 per cent over the period.

The central bank forecast in August that inflation would pick up sharply to hit its 2 per cent target in about a year and then overshoot for the next couple of years, as sterling’s big fall after Britain’s vote to leave the EU pushed up the cost of imports.

Risk

But the surge in inflation risks proving bigger, after sterling plunged to its lowest level on record against a basket of currencies last week, something which is likely to force the Bank of England to revise up its inflation forecasts next month.

The slide in sterling – combined with evidence that the economy is slowing by somewhat less than the Bank of England thought likely – also means few economists now expect the Bank of England to press on with plans to cut interest rates to a new record low next month.

A pricing row last week between Britain's biggest retailer, Tesco, and one of the world's largest consumer goods companies, Unilever, was a first clear sign for consumers of the turbulence unleashed by the Brexit vote and of higher inflation to come.

The pound’s fall – down 19 per cent against the US currency and about 16 per cent against the euro – has left suppliers and retailers battling for profits as imported goods become more expensive.

Tesco briefly halted online sales of goods produced by Unilever – which owns brands such as Marmite and Ben & Jerry’s ice cream – because of the increase in prices.

British inflation has been below the Bank of England’s 2 per cent target for nearly three years and last year it was zero, the lowest since comparable records began in 1950.

Bank of England governor Mark Carney last week said the central bank could tolerate "a bit" of an overshoot against its inflation target, to help accommodate economic growth and employment.

It will release new inflation forecasts next month.

Core inflation

An ONS measure of core consumer price inflation – which strips out changes in the price of energy, food, alcohol and tobacco – rose to 1.5 per cent from 1.3 per cent, slightly above economists’ expectations for 1.4 per cent.

Factory gate prices increased 1.2 per cent, the biggest increase in three years, and slightly stronger than forecasts of a 1.1 per cent annual increase.

The ONS also released figures for August house prices, which showed an 8.4 per cent annual rise across the United Kingdom as a whole compared with 8 per cent in July.

Prices in London alone increased 12.1 per cent. – (Reuters)