The pound edged off highs this morning after official figures showed inflation rose by its most in more than five years in September, in the latest sign consumers are becoming increasingly squeezed.
The consumer prices index rose to three per cent in September from 2.9 per cent in August, figures by the Office for National Statistics showed, while the CPIH, which factors in housing costs, rose to 2.8 per cent, from 2.7 per cent in August.
Meanwhile the retail prices index remained at 3.9 per cent, slightly lower than the four per cent economists had expected.
The pound, which had been trading strongly against the dollar, edged slightly lower to $1.3276, although that was still 0.2 per cent up on the day. It dipped to €1.1278 against the euro, down from a high of €1.1283.
“The pound in your pocket is depreciating, as the rising price of goods continues to chip away at its value," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"It’s important to keep some perspective however, and while consumers may be constrained, they’re not down and out. Employment remains high and borrowing costs are low, for the time being at least.
"It’s worthy of note that inflation has been above this level for around four of the last 10 years, and it’s really only since 2014 we’ve become accustomed to inflation running below the Bank of England’s... target. Meanwhile those who remember the hyperinflation of the 1970s will be wondering what all the fuss is about."
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The figure, which was slightly lower than economists' expectations of 3.1 per cent, means Bank of England governor Mark Carney narrowly misses out on being forced to write a letter to the chancellor explaining why prices are rising far faster than the target rate of two per cent.
However, the high level of inflation adds further fuel to arguments now is the time to raise interest rates. Carney has already dropped heavy hints the monetary policy committee is likely to hike rates from their historic low of 0.25 per cent at November's meeting.
However, analysts were cautious about Carney's confidence.
"The tick upwards in inflation will increase expectations of a rate rise from the Bank of England later on this year, stoked by a flurry of hawkish rhetoric coming from Threadneedle Street," added Khalaf.
"This wouldn’t be the first time the bank has talked the talk without walking the walk however, so it’s probably best not to count those chickens until they’re hatched."