Equities Macro

UK Inflation Surge Boosts British Pound

The cost of living in the UK jumped to a joint four-year high in August, official data from the Office for National Statistics, (ONS) showed Tuesday. The faster than expected pace of inflation helped push the pound higher, as it suggests a Bank of England (BOE) rate hike will come sooner than previously expected.

The ONS said the all-items Consumer Prices Index (CPI), climbed 2.9% on the year in August, up from July’s 2.6%. The monthly measure showed a 0.6% rise in the average price of consumer goods between August and July.

The main contributors to August’s faster pace of inflation, were:

  • Clothing prices.
  • Fuel costs.

The weaker level of the pound was behind the continued rise in clothing prices, as it’s become more expensive for importers to bring clothing to the UK from overseas.

The ONS added that airfares rose at a slower pace than a year earlier, which weighed on the price increase a little.

A broader calculation of the CPI, which includes housing costs, also rose at a faster pace in August than July. The CPIH rate of inflation hit 2.7%, up from 2.6% a month earlier.

The ONS confirmed the BOE’s Monetary Policy Committee received a copy of the CPI index for its Friday September 8th meeting. The MPC will announce its latest interest rate decision on Thursday, which is broadly anticipated to see rates remain on hold at 0.25%.

Previously, the BOE said it expected inflation to hit 3% in October, something Tuesday’s data suggest could happen in September. With the rate of inflation rising sharply, investors are likely anticipating the UK’s first interest rate hike in a decade, could come sooner than expected.

Indeed, the pound rose to a one-year high against the dollar of $1.3280, following the CPI release. That suggests traders are more confident of a rate hike, soon.

In the meantime, inflation remains higher than earnings growth – which was 2.1% in the three-months to June. That means real-time earnings continue to decline, as the cost of living rises more quickly than earnings.

That detail, combined with an uncertain economic outlook, makes the BOE’s job much harder than just balancing the level of inflation.

As of 10:55 BST, Tuesday, 12 September, GBP/USD share price is 1.3117.

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