Data this morning has shown that the UK headline inflation figure has risen to 4.5%, but expectations of a higher figure had already been priced in over the morning. With the previous figure showing that prices had increased by 4.0% from the same point last year this latest monthly rise is in line with strong global price pressures. As the highest UK inflationary figure rise since 2008, the increase is well ahead of the forecasted 4.2% rise.
This indicates that last month’s ease in price pressures was due to temporary factors, with fuel prices and the VAT rise taking their toll on UK inflation. The market had a BoE rate rise priced in for December 2011, and I wouldn’t be surprised if today’s data brings some of those bets forward.
King recently indicated that UK headline inflation could hit 5.0% in the coming months – if he is right then it could well force the MPC to succumb to pressure and raise rates.
Sterling spiked in the build-up to the data release, but how far it will push on from here in light of the upside surprise remains to be seen. UK inflation is expected to climb quite aggressively, and despite today’s data there is still a need for much stronger UK growth before the BoE tightens policy. King’s open letter to George Osborne later today and tomorrow’s MPC minutes should clarify the level of genuine hawkishness within the BoE - a rate rise before December could be disastrous.
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