Inflation rise sparks sterling spike

Sterling has rallied strongly in the wake of the latest UK inflation data, with higher prices for motor fuel, alcoholic drinks and accommodation sparking a 0.6% rise for CPI in July, compared with 0.5% in June.

Inflation rise sparks sterling spike

That reversed sentiment for the pound, which earlier hit its lowest level against the euro since 2013 after a seven-day losing streak.

“The Office for National Statistics has pointed out that although CPI inflation is now at its highest level since November 2014, it is still low in historic terms,” said Joshua Mahony, market analyst at IG.

“The figure was slightly more than economists had expected, but it doesn’t yet move the dial for the Bank of England’s monetary policy makers, who have arguably shifted their focus to growth and jobs in the wake of the referendum result.”

Calum Bennie, savings expert at Scottish Friendly said: “July’s rise in inflation is likely to herald further rises in the cost of living as the price of imports increase following the fall in the pound post Brexit. Clearly this is not good news for the pound in peoples’ pockets and makes life even more difficult for those looking to save for their financial future.

“We can expect a clearer view of the effects of Brexit on the economy over the next few months. In the meantime, with interest rates remaining low, stocks and shares ISAs provide an attractive alternative to cash savings, although risk is attached.”

David Lamb, head of dealing at FEXCO Corporate Payments, found the rally in the pound ironic: “The Pound, whose slump following the Brexit vote is blamed for the rise in inflation, responded to the news – by rallying!

“The weak Pound is widely seen as the prime suspect behind Britain’s inflationary fears. For it to rise on the CPI increase is a bit like the criminal showing up to help in the manhunt.

“However inflation remains modest by historical standards, and with the ONS data showing that core inflation slipped from 1.45% to 1.3% in July, the full inflationary effect of Sterling’s weakness has clearly yet to be felt.

“Most marketwatchers predict that more expensive imports will drive up prices steadily this year. But with CPI so far adrift of the Bank of England’s 2% inflation target, no-one expects rising inflation to prompt the Bank to reassess monetary policy any time soon.

“With UK interest rates near zero and the QE money presses rolling at full speed, Sterling’s appeal to foreign investors remains minimal.

“As a result, the prospects for the Pound in the medium-term are modest at best. It may have rallied from Monday’s lows, but this bounce is likely to be short-lived.”

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