Sterling falls as UK inflation spikes to 16 year high
16 September 2008
The Pound sank across the board on Tuesday morning after British consumer prices rose to their highest level in 16 years in August and more than double the Bank of England’s inflation target, prompting the Governor, Mervyn King to publicly explain why prices have risen so high. The Office for National Statistics revealed CPI was 4.7% higher last month than a year ago from 4.4% in July and recording the highest level since April 1992.
The ONS said the latest rise was primarily driven by an increase in average gas and electricity bills this year and noted that two major energy suppliers raised their tariffs in late July. However, this was in some part offset by a dip in the price of petrol and heating oil which fell following a decrease in the price of crude oil. The figures underlined the BoE’s caution about easing monetary policy to revive stuttering growth, however given the recent financial turmoil in the US, market expectations for rate cuts have heightened in recent days.
In an open letter to the Chancellor published after the inflation release, Mervyn king said consumer price inflation was likely to peak soon near 5.0%, but remain above the Central Bank’s 2.0% target deep into 2009, especially if Sterling’s recent depreciation is sustained. He also reiterated that in order to tame inflation, the outlook for UK interest rates remained “highly uncertain” and expected to write a number of explanatory letters into next year.