The pound hit a one-year high against the dollar after official data showed UK inflation was higher than expected in August.
Sterling rose 0.8 per cent to $1.3268 in morning trading after figures from the Office for National Statistics (ONS) showed prices rose 2.9 per cent in August, compared with a 2.6 per cent rise in July.
The ONS said motor fuels and clothing were the main contributing factors to the rise, although air fares also edged up during the month.
The low exchange rate pushed clothing and footwear prices up 4.6 per cent in August, a record high, the ONS said. Meanwhile, the cost of motor fuels and air fares had a "large upward effect", with petrol prices rising 1.8p per litre.
Including owner-occupiers' housing costs, CPI was 2.7 per cent, up from 2.6 per cent in July.
Analysts suggested strong inflation could influence the Bank of England's rate-setting monetary policy committee.
“The thorny issue of inflation will be the driving force behind any rate rise decision on Thursday. Economists have suggested that now is finally the time that the Bank takes a more hawkish turn, after eight and a half years of ultra-loose policy," said Maike Currie, investment director for personal investing at Fidelity International.
However, she added this may be a blip.
“Investors remain sanguine about inflation returning with a vengeance, believing any rise will be fleeting as the impact of the weaker pound following last year’s Brexit vote falls out of the equation.
"Then there are long-term structural trends likely to keep a lid on inflation like an aging population limits the size of the global workforce, which by corollary suppresses economic activity.
"Then there’s the fact that rising inequality and the growing cohort of self-employed people with limited earning power, such as Uber and Deliveroo drivers in the so-called gig economy, means less money to spend. Less economic activity, and less money spent, means prices are unlikely to be driven upwards, keeping inflation low over the long term."
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