British pound gains on near six-year high UK CPI rate

British pound gains on near six-year high UK CPI rate

The British pound gained some support earlier Tuesday, from official data showing a higher-than-expected increase in the UK’s consumer price inflation rate. However, the UK currency lost a little ground, shortly after the release.

At 0930 BST, the Office for National Statistics (ONS) reported the UK’s CPI rate rose to 3.1% in November. That’s the highest rate since March 2012 and up from October’s 3.0%.

The British pound rose against the US dollar to trade at $1.3379 just after the data were published. However, by 1050 BST, cable had slipped to $1.3323. The British pound was worth $1.3359 at the UK market close, Monday.

Driving forces behind surprise CPI increase

The ONS said the main driving forces behind the higher than expected CPI rate in November, was a combination of:

  • Air fares.
  • Computer games.
  • Recreational and cultural goods and services.

 “CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year,” said ONS head of inflation, Mike Prestwood. “These upward pressures were partly offset by falling costs of computer equipment.”

“The prices of raw materials and goods leaving factories continued to increase as oil and petrol prices continued to rise,” Prestwood added.

Consumer squeeze continues

The CPI rise comes as average UK earnings growth is just 2.2%. That means that in real terms, the effect for many Britons is their earnings feel as though they’re falling – because their wages can’t buy as much as they have in the past.

However, if higher inflation persists, which it could do given the higher level of oil prices right now, the Bank of England (BOE) may raise UK interest rates more quickly than currently anticipated. And it’s that possibility that’s supporting the British pound.

The BOE, though, take a two-year view and right now aren’t expecting the higher inflation rate to persist for too long.

By Ilona Billington
Ilona is a freelance writer and editor with over 15 years experience reporting and writing about UK and European economics, real estate, financial markets and central banks.

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