The pound rallied on Wednesday morning as official data showed UK inflation continues to soar.
Figures from the Office for National Statistics (ONS) showed consumer price inflation hit 2.5% in June, jumping sharply from May’s reading of 2.1%. June’s number was above forecasts of a 2.2% rise and well above the Bank of England’s 2% target.
The reading heaps more pressure on the Bank of England to raise the UK’s rock-bottom interest rate to stop the economy overheating.
“If inflation continues to creep away from the Bank of England’s 2% target, the central bank may be forced to act sooner than anticipated when it comes to raising interest rates,” said Rachel Winter, Associate Investment Director at Killik & Co.
The possibility of a rate rise spiked the pound. Sterling was up 0.1% against the euro to €1.1741 (GBPEUR=X) an hour after the data and the pound was up 0.2% against the dollar to trade at $1.3845 (GBPUSD=X).
The Bank of England has so far resisted pressure to raise interest rates, arguing that a spike in inflation is being driven by a temporary reopening boom that will fade over the next 12 months.
“The upside surprise in the UK’s CPI [consumer price inflation] reading could question the BOE’s view that inflation is transitory as the consumer price gauge recorded its second beat in two consecutive months,” said Sam Cooper, vice president of market risk solutions at Silicon Valley Bank.
“The data has provided sterling with an immediate boost against the dollar, as it provides evidence inflation is running hot on both sides of the Atlantic and the BoE is subsequently under the same pressures as the Fed to monitor price rises and potentially tighten their grip on monetary policy.”
Inflation data published on Tuesday in the US showed price rises are running at a 30-year high.
“We can’t tell if rising prices are a statistical blip, or a more concerning and permanent feature of the global economic recovery,” said Laith Khalaf, a financial analyst at stockbroker AJ Bell.
Sam Tombs, chief UK economist at Pantheon Macroeconomics, said UK inflation was likely to hit 3% by the end of the year before dropping back in early 2022.
– Yahoo Finance