Sterling hit its highest level in a year against the dollar on Wednesday as investors awaited labour market data for signs of a pickup in wage growth after this week’s surge in inflation.
Cost pressures for United Kingdom companies increased, with producer input price inflation spiking to 7.6% from 6.5% in a reversal of some of the recent downward trend in costs.
In another report, United Kingdom producer prices jumped surprisingly higher in August as well due to the exchange rate’s weakness and increased fuel costs.
She said: “Worries about high inflation expectations becoming entrenched and the degree of spare capacity in the economy may well lead to more MPC members voting for a rate hike sooner rather than later”.
Traders have bet big on a rise in GBP – and so far have won – but consumers and the United Kingdom economy may struggle in the longer term.
Whatever the outcome all eyes will now be on the BoE ahead of its latest monetary policy meeting later this week as investors look to the bank to see what moves it will make in order to prevent household finances from deteriorating any further.
For some time, expectations were for inflation to rise a little more sharply than that expected by the BoE, peaking at 3.1 percent in the fourth quarter.
“The larger-than-expected rise in United Kingdom inflation in August has thrown the spotlight back on the United Kingdom interest rate debate”, said Adam Chester, head of economics at Lloyds Bank’s commercial banking arm.
“If inflation doesn’t fall back for whatever reason – the most likely reason would be sterling weakness on account of Brexit debates – then the need to start bringing forward rate hikes and increasing their number intensifies”.
Earnings are tipped to grow 2.3% from a year earlier in July, up from 2.1% in June.
“The combination of this along with high levels of debt, creates the threat of deflation – the stuff of nightmares for central bankers – and explains why they remain so cautious to “normalise” monetary policy at present”.
The pound jumped to near year-highs against the dollar, a signal that some traders, at least, think that borrowing rates could be heading higher later this year or early next.
However, for the majority on the MPC the key metric is likely to be domestic inflation, which means that tomorrow’s employment and wage growth data will also generate considerable interest’.