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CPI Inflation rises to 2.9%

The latest ONS inflation data came out this morning, and it showed a huge jump in the 12-month Consumer Prices Index, rising to 2.9% in August, up from 2.6% in July. These increases were broad based, with prices for clothing and footwear, furniture and household goods and restaurants and hotels rising at their fastest rates since 2012 or earlier.

Air fares also rose between July and August but the rise was smaller than between the same two months a year ago and so resulted in a partially offsetting, downward contribution.

The big question following this release, however, is how will the BOE respond to it?

CPI remains well above the Bank of England’s 2% target and it can be expected to remain above this target throughout 3Q & 4Q of 2017.

Imports make up a large percentage of these goods and it is possible that the price rise can still be attributed to 2016’s sharp decline in sterling causing the consumer to come under increasing pressure.

Although it is very unlikely that the BoE will step in this week to hike rates and help to ease this pressure on consumers, how long can they wait before they do so?

It is certainly possible that the vote split could signal a hawkish shift at the Bank, with the potential for chief economist Andy Haldane to vote for a rate hike, but the bigger interest could be whether Governor Carney follows suit.

In a speech he made in June, Mr Carney mentioned the fact that the BOE could not ignore rising prices indefinitely.

Is now the time for the Governor to put his money where his mouth is and vote for a rate hike? If yes, then sterling is very likely to fly high, with $1.35 a distinct possibility.

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