Inflation rises more than expected

Government Decision Expected On Euro

The Bank of England will meet to decide whether to raise interest rates this week

The Office for National Statistics (ONS) have released figures showing that the Consumer Price Index (CPI) measure of inflation was 2.9% in August, outstripping the predictions of 2.8%.

Economists predict that inflation jumped to around 2.8% per year in August, up from 2.6% in July. Everything they import has suddenly become a lot more expensive, and this was felt in yesterdays inflation readings, with the price of clothes being a major factor in the inflation increase.

"If yes, then sterling is likely to fly high, with $1.35 a possibility for GBP/USD".

Bets on the Bank of England increasing interest rates increased this week after inflation climbed to 2.9% in August, matching the highest pace in four years. This may change if rising prices start feeding through to wages.

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The market used the data as an excuse to take profits on GBP longs after a decent sized rally and ahead of the Bank of England meeting tomorrow. In real terms, wages have been falling since April and dropped by an annual 0.4 percent in the three months to July. But Paul Hollingsworth, an economist with Capital Economics, said he expected inflation to peak at 3.1 per cent in October. We also have the CPI data from the USA a bit after that and this should also bring in a lot of volatility as it will give a glimpse of the USA inflation and tell us whether the economy continues to recover.

Britain's jobless rate is at its lowest level in 42 years, but family budgets face shrinking levels of income as inflation outstrips wage rises.

The risk of a "bumpy Brexit" does not mean the Bank should keep interest rates at their record low, MPC member Michael Saunders said recently, as the central bank risked being rushed into sharper rate hikes in future, potentially hurting growth.

In another report, United Kingdom producer prices jumped surprisingly higher in August as well due to the exchange rate's weakness and increased fuel costs.

Andrew Sentance, senior economic adviser at PwC, said that, as the pound continues to to struggle on the foreign exchange markets, the surge in inflation has further to run.

His cautious comments raise the chances the European Central Bank will opt to phase out its 2.3 trillion euro bond buying scheme only very slowly next year, despite solid economic growth. That has eroded households' purchasing power and led to a slowdown in consumer spending, the main driver of Britain's economy.

But recall that the MPC previously acknowledged that the risk of the pass-through from the exchange rate to inflation are higher and more prolonged that it has estimated.

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