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Pound Sterling jumped after the UK reported a broad-based inflation rise in October.
The Pound to Euro exchange rate rallied to 1.20 in the minutes after the ONS said CPI inflation rose to 2.3% year-on-year in October from 1.7% in September, which was a bigger rise than the 2.2% the market was anticipating.
This is after the monthly rate of inflation rose to 0.6% in October, from being flat the month before.
The crucial CPI services annual rate rose from 4.9% to 5.0%, sending the Bank of England a stark message that it must remain vigilant of cutting interest rates too fast.
The Pound to Dollar exchange rate rallied back above 1.27 as it followed a rise in UK bond yields, reflecting expectations that borrowing costs will stay higher for longer. The odds of a December rate cut retreated following the release, consistent with the Pound's rise.
"Renewed price pressures from the fiscal loosening in October’s Budget means that the CPI rate is likely to stay above the 2% target for longer than previously expected," says Alpesh Paleja, Interim Deputy Chief Economist at the CBI. "Coupled with continued strength in services price inflation and wage growth, this all but rules out the prospect of a faster pace of rate cuts in the year ahead."
The ONS says rising lift and electricity costs drove the increase in inflation in October after Ofgem lifted its energy price cap in October 2024.
Electricity prices rose by 7.7% in October 2024, having fallen by 7.5% between the same two months last year. Gas prices rose by 11.7% in October 2024, having fallen by 7.0% between the same two months last year.
"So much for predictions of sub-2% inflation. Since May 2021, there have been 41 months of CPI inflation of 2% or more and just one month under 2pc (Sep 2024). OBR and BoE now predicting a prolonged period of >2% inflation with Budget tax increase adding to upward price pressures," says Andrew Sentance, a former member of the Bank of England's MPC.
Above: GBP/USD at 1-minute intervals showing the post-CPI release spike.
The British Pound has been one of 2024's best-performing G10 currencies, aided by a series of economic growth surprises and a cautious approach to interest rates at the Bank of England.
However, growth has stalled since the election and the budget is anticipated to lead to job losses as employers face a rise in job taxes and increasingly unfavourable employment laws.
This creates an unsavoury cocktail of low growth and high inflation, or stagflation.
"The surprising strength of the latest inflation figures gives the Bank of England a conundrum. With economic growth in the UK stalling, rate cuts would seem like the appropriate medicine, however, cutting rates into inflationary strength wouldn't usually be what the economic doctors order," says Isaac Stell, Investment Manager at Wealth Club.
A stagflationary environment would not be supportive of the Pound in 2025.
An original version of this article can be viewed at Pound Sterling Live