The rate of inflation in Britain rose again last month and now stands at its highest level since November 2008.
Standing at 3.7%, up from March’s figure of 3.4%, the data once again beat expectations. However, even a leap of this extent will have little impact on the markets with investors heavily focused on the government’s upcoming budget proposals. The market is also expecting little change in rhetoric from the Bank of England, which recently in its quarterly report maintained its line that inflation will head back towards the 2.0% target in the coming months.
Duncan Higgins, senior analyst at Caxton FX comments, “The Bank’s policy has for some time now been that the prevailing degree of spare capacity in the market should start to push headline inflation sharply lower. At present the rate of increase is showing little sign of slowing. Certain policymakers have already voiced their concern about these upward pressures and April’s figure could bring more people into their school of thought.”
Sterling’s comparative weakness, which raises the price of imports, is serving to offset the cheaper value of British exports. There are also fears that should the government choose to raise VAT, which Cameron has refused to rule out, inflation may remain on its current course.
“Although at present the Bank believes that the downside pressures on inflation are stronger, there are clearly still significant risks to the upside. In his budget should Osborne outline plans to raise VAT, inflation could take significantly more time to drop back down. In this scenario, the Bank could come under increasing pressure to raise interest rates in order to curb rising prices,” continues Higgins.
Taking its lead from sovereign debt concerns, sterling is lower again this morning, trading around 1.1650 against the euro and 1.4450 against the dollar.
