Sterling gained 0.77 cent to $1.5665 against the dollar and racked up similar ground against the euro as the Consumer Prices Index — forecast to stay becalmed at 0% — ticked up to 0.1%.
The fall in the headline rate was largely because clothes shops cut prices by less than last year. But currency markets focused on the sharp rise in “core” inflation — stripping out volatile food and energy prices — which jumped from 0.8% to 1.2% in July
The more hawkish picture of underlying inflation came a day after Bank of England rate-setter Kristin Forbes said a “preventative” rate rise could be needed to avoid “sunburn” for the economy.
Jeremy Cook, chief economist at payments firm World First, said the Bank would continue to look through low headline CPI as long as core inflation was on the rise:
“The rise to 1.2% — the highest in five months — will flesh out the argument that domestic inflation is building and that the headline figure is only this low due to external factors — commodities and the pound,” he said. “This is crucial for rate hikes.”