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Pound jumps as inflation returns to the UK

Rally in sterling gathers strength after new data shows prices rose 0.1% year-on-year in July.

Pound jumps as inflation returns to the UK

Update: The pound has jumped against the dollar, on news that prices are once again rising in the UK, albeit at a slow rate, as the Office for National Statistics (ONS) reported that inflation returned with a 0.1% rise in July.

The year-on-year rise in the consumer prices index is up from June's 0% figure and higher than investors' expectations of another month of flat prices.

The ONS said a smaller fall in clothing prices compared to the same period a year ago was the main reason for the rise in inflation, with falling price for food and drinks weighing on the figure.

The small rise in prices continues a trend seen since February, where inflation has remained around the 0% mark, with the tumbling oil price and supermarket price wars major factors. Core inflation, which strips out volatile food and fuel prices, reached 1.2% in July, up from 0.8% in June.

The pound jumped 0.8% against the dollar to $1.570 on the news, building on an immediate jump following the release of the data.

'The surprise rise, especially in the core rate, has led to a knee-jerk spike higher in the pound and reaffirmed market expectations that UK interest rates could rise in the first half of 2016,' said Adam Chester, head of economic reserach at Lloyds Commercial Banking.

Ben Brettell, senior economist at Hargreaves Lansdown, added: 'The rise in the core figure suggests that inflationary pressures could be building in the economy, and is possibly the clearest indication yet that the Bank of England might have to raise interest rates sooner rather than later.'

Maike Currie, associate investment director at Fidelity Personal Investing, said the marginal rise in inflation 'puts the rate rise debate back on the table'.

'Low inflation has meant the monetary policy committee (MPC) remain dovish on raising interest rates, but the tide could be turning in favour of an interest rate hike,' she said.

'Earlier this month, the MPC minutes showed one member, Ian McCafferty, voted in favour of an interst rate hike. And in the last few days, Kristin Forbes, another MPC member, has voiced her concerns about keeping rates at record lows, saying interest rates will need to be increased before inflation hits the 2% target.'

Azad Zangana, senior European economist at fund group Schroders, said the Bank of England was only likely to consider a rate rise when inflation returns to 1%, 'which may not happen before the second quarter of 2016'.

The retail prices index (RPI), which includes the impact of mortage costs, remained unchanged at 1% year-on-year in July. 'This is good news for rail passengers as the government has pledged to only raise rates by RPI next year,' said Zangana. 'At just 1%, the next fare increases will be considerably lower than those seen in previous years, and should be lower than wage inflation in 2016.'

2 comments so far. Why not have your say?

geoffrey mulford

Aug 18, 2015 at 21:03

So inflation is at 0.1% so now £10 is only worth £9.99

OH but wait a minute the pound has just gone up by 0.8% so now £10 is worth £10.07 all this because they think interest rate will go up by 0.25%.

It would take 3 years at 0.25% to make back the 7p some one would have lost by moving his money too late.

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Aug 19, 2015 at 00:02

More madness from from the financial establishment. A complete systemic view is clearly way beyond their reach.

We have now it seems moved beyond QE, a costly exercise in which one form of promissory note was exchanged for another of almost equal value (GBP for Gilts). This has had no proven benefit other than for the commercial banks that found salvation, profiting from the inherent inefficiency of the system. In the end result, the books of the bank of England are hopelessly compromised by the essentially unsaleable overhang of gilts (how does one value unsaleable assets?).

The latest manifestation of incompetence lies in the senseless manipulation of currency values. Is the ability of the pound to float up and down against the Euro and the currencies of our other major trading partners like a yoyo really a benefit?

£ Euro rates (approx)

Jan 2006 -28% Jan 2009 +7.3% May 2010

(Election) + G Osborne

May 2010 +8.9% August 2012 -8.3% Mar 2013 +21.5% July 2015 ... ... where next?

This makes nonsense out of the single market. No wonder British Industry continues to shrink, how can anyone in Europe take the risk of contracting in Britain unless there is no other choice? At least Sweden, with the Swedish Crown, has the sense to substantially track the Euro. And of course, despite the fiscal difficulties in Euroland, the German economy has been doing very well, in large measure because of the Euro!

Yes of course at some stage our rates must go up. But changing interest rates has an important International dimension, not just a domestic effect. If the mere rumour of a change in rates is enough to distort the value of our currency then I suspect that the BoE isn't doing its job properly. Surely it should be filling up its coffers with cheap Euros now so as to provide a more stable exchange rate?

A trouble is that a strengthening currency has its political attractions. It keeps the price of the imported goods upon which we all depend low, but the consequential forward damage to our industry and international trade relations is not so easily noticed!

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