Pound soars as shock inflation rise squeezes UK households

UK households were hit by a shock rise in the cost of living today, sending the pound spiking higher against the dollar.

The rising cost of autumn clothes, sea fares and — most eye-catchingly — theatre tickets sent the Consumer Prices Index soaring to 2.7% in August, the highest for six months.

The surprise out-turn — predicted by none of the 36 economists surveyed before the figures — confounded expectations of a fall to 2.4%, and sent sterling above $1.32 for the first time in two months. Currency markets speculated that the figure, combined with stronger-than-expected growth, might encourage the Bank of England’s hawks to push for another rate rise amid concerns over how quickly inflation will return to the Bank’s 2% target.

Balraj Sroya, sales trader at Foenix Partners, said: “Recent stellar data being released from the UK along with Brexit negotiations gaining momentum could lead to a significantly more hawkish Governor at the next Bank of England meeting, a stark contrast to the cautious Mark Carney we saw this month.”

The pound also gained ground against the euro, although most economists expect the Monetary Policy Committee to hold fire on any further rate rises until the UK formally leaves the EU next March.

The upward pressure came mainly from prices in recreation and culture, which jumped 3.6% year-on-year in the biggest rise for eight years. So-called “cultural services”, including theatre tickets, rose even more steeply, up 5.9%. Sea and airfares added to inflation, while average clothes prices jumped.

ING senior economist James Knightley said the data were a “bit of a shocker” but said the CPI was likely to return to the 2% target early next year. “There has been some better activity data, but it is unlikely that UK corporates have finally got significant pricing power … the economy continues to underperform key partners.”

The sudden rise in the cost of living however erodes the real-terms spending power of UK consumers, which had been gradually recovering after two years of pain since the Brexit vote and sterling’s fall. Wages grew at 2.9% in the quarter to July.

Tej Parikh, senior economist at the Institute of Directors, said: “Today’s figures underline that meaningful wage growth is still a distant prospect for the time being.”