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Pound rallies again as UK inflation picks up in July

The consumer price index (CPI) in the UK rose to an annual rate of 0.1% in July, beating estimates that it would remain unchanged at 0%. The month-on-month rate fell by 0.2%, against estimates it would fall by 0.3%. Core CPI, which excludes volatile items such as food and energy, also accelerated, rising to 1.2% in July from 0.8% in the previous month. Forecasts were for a more modest rise to 0.9%.

Falling food and fuel prices were the biggest downward contributors to July’s inflation rate. In the 12-months to July, food prices were down by 2.7% and motor fuels were 11.4% lower. Upward pressure came from clothing & footwear and transport services. Smaller discounts between June and July 2015 compared to the same period in 2014 were the main reason for the upward contribution of clothing prices. While a larger increase in transport fares such as air fares in 2015, versus in 2014, accounted for the upward contribution of transport services.

Producer prices, also out today, were mixed. Input prices were down 0.9% in July from the previous month, against estimates of a 1.9% drop. Output prices were in-line with estimates coming in at -0.1% month-on-month.

The pound surged after the release of the data as some analysts were expecting inflation to fall back into negative territory. Today’s figures alleviate any immediate fears of inflationary pressures dissipating in the coming months but the stronger pound and renewed weakness in crude oil prices are likely to keep prices subdued in the near future. The Bank of England has already said that it would prefer to raise rates sooner and more gradually than wait longer before starting to increase its base rate. But it faces a difficult task of not underestimating the downside pressures such as weak global demand and falling commodity prices against accelerating domestic wage growth.

Sterling jumped by 0.6% against the dollar from around 1.5583 to a 7-week high of 1.5671, extending its gains to 1.5694 in afternoon European trading. It also rallied against the euro, as the single currency fell sharply to 0.7040 from 0.7113 before the data. Against the yen, the pound jumped to 195.27 before later easing to 195.00.

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