UK consumer price inflation was announced today and it came in at 4%, which is double the Bank of England’s target. The rate was in line with investor expectations as VAT rises, higher fuel prices and increased commodity prices increased the value of the UK shopping basket.
The Pound initially declined as the news was released. Investors immediately unwound positions that were linked to a surprise rise above 4%. As the day progressed Sterling rose against all of the major currencies, as this latest data release strengthens the case for an interest rise in the coming months.
The Bank of England governor Mervyn King said in a public letter to the Chancellor that accelerating inflation is temporary and raising interest rates too quickly could damage the economic recovery. The comments almost mirror those of the UK Business Secretary Vince Cable, who said in a televised interview yesterday that he supports policy makers looking to keep interest rates on hold at 0.5%.
Sterling finished the day up by 0.5% against the Euro, 0.7% against the US Dollar, and a per cent against the Japanese Yen. Sterling is also now at 3 month highs against the New Zealand Dollar and the Australian Dollar and is at a year high against the South African Rand.
Elsewhere data released in the USA showed their economy is recovering. The retail sales index came slightly below expectations, suggesting a slight increase in high street spending. The Empire Manufacturing Index was also released and was also near to expectations. Signs of a recovery in the US will improve investor sentiment.