LONDON — The pound has climbed to its highest level in a year against the dollar on Tuesday morning after inflation data from the Office for National Statistics came in above expectations.
The UK’s Consumer Prices Index (CPI) inflation rate — the key measure of inflation — was 2.9% in August, up from 2.6% in the previous month, according to the Office for National Statistics.
Inflation had been expected to climb to 2.8% from the 2.6% level seen in both June and July, according to economists polled before the release. Instead, it hit its joint highest level since the Brexit vote last summer.
The pound took off on the back of the news, climbing around 0.7% to trade against the greenback at $US1.3263, a level not seen since September 2016 before the so-called October flash crash wiped several per cent off the pound’s value.
The chart below shows the pound’s performance on Tuesday, as of 11.05 a.m. BST (6.05 a.m. ET):
“GBP/USD reached its highest level in a year earlier, although it has backed away from earlier highs,” Kathleen Brooks, head of research at CityIndex said in an email.
“In fairness, if the pound can’t rally when the dollar is this weak then something would be amiss. At this stage, cable moves are as much about USD weakness rather than UK inflation.”
The pound is set to come into sharp focus this week ahead of the Bank of England’s September Monetary Policy Committee meeting on Thursday. With inflation rising, the bank faces a policy trade off. The bank must balance surging inflation brought on by the weakened pound since the referendum with the slowdown in the economy, dwindling consumer spending, and declining inward investment.
So far, the dwindling economy side of the argument has largely held sway on the MPC, with the closest vote held since the Brexit seeing three members of the committee backing an increase in rates back to 0.5%, and five voting to leave rates unchanged.
The latest inflation figures, as well as communications from the bank, suggest that a rate hike may be on its way sooner than expected.