Sterling edges off session lows as inflation beats expectations

Emma Haslett
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Inflation was higher than expected - but still way off the Bank of England's target (Source: Getty)

The pound reversed some of its losses against the dollar this morning, after new figures showed inflation beat expectations in June.

Prices rose 0.5 per cent in the year to June, the Office for National Statistics (ONS) said - up from 0.3 per cent in May, and beating economists' expectations of 0.4 per cent.

The rise was an encouraging sign - but still far from the Bank of England's target of two per cent.

The ONS said prices had been pushed up by air fares, motor fuels and a "variety of recreational and cultural goods and services" - although furniture and furnishings and accommodation services had a deflationary effect. Meanwhile, house prices were up 8.1 percent in the year to May.

The news caused the pound to rise to $1.3218, from a session low of $1.381, although it was still more than 0.3 per cent down.

Sterling also rose slightly against the euro, moving off a session low of €1.915 to hit €1.1930.

“The rising cost of European air flights, possibly boosted by the Euro football championships, was the biggest reason for this month’s increase in inflation," said Phil Gooding, a statistician at the ONS.

“The growing cost of oil, feeding through to petrol prices, also helped nudge up CPI."

Pre-referendum data

He added that as the figures were collected before the EU referendum, recent falls in the value of the pound will have had no impact on them - although analysts suggested it may begin to have an effect.

"Sterling has dropped significantly since the Brexit vote and for a net importer like the UK, it is only a matter of time until this filters back into the cost of goods," said Nick Dixon, investment director at Aegon UK.

"The question for policymakers is how manageable these prices rise will be and whether or not they will stabilise around target.”

"Sterling weakness does look set to increasingly feed through over the coming months to markedly push inflation higher as it raises prices for imported goods and services, oil and commodities," added Howard Archer, chief UK and European economist at IHS Markit.

"We suspect that the pound is headed for further weakness despite its recent stabilisation."

Interest rate is still about to become interesting

Archer pointed out that, despite the stronger-than-expected inflation data, it's still likely the monetary policy committee will cut interest rates when they meet at the beginning of next month.

"The rise... is unlikely to deter the Bank of England from pressing ahead with monetary policy stimulus in August given serious concerns and uncertainties about the economic situation and outlook," he said.

"We also suspect that Bank of England will revive quantitative easing in August and it could also very well extend its Funding for Lending Scheme."

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