Pound soars as inflation leaps and Fed chief Janet Yellen talks down US economy

The latest data comes against the backdrop of a buoyant jobs market and an economy growing at its fastest annual pace since 2007

The pound surged to new six-year highs against the dollar last night as an inflation shock fuelled expectations of UK interest rate rises while a dovish Federal Reserve chair Janet Yellen warned over “false dawns” for the US economy.

A surprise rise in the Bank of England’s Consumer Prices Index benchmark from 1.5 per cent to 1.9 per cent in June – the biggest monthly increase since October 2012 – caught the City off-guard and sent sterling racing nearly a cent higher against the dollar.

Then Ms Yellen’s comments in the afternoon to the Senate Banking Committee – in which she stressed that rates would stay at rock-bottom levels for “some time” to support a recovery “not yet complete” – sent the pound as high as $1.7192 against the dollar, the highest since October 2008.

The Office for National Statistics said the sudden increase in the cost of living in the UK was partly driven by rising clothes prices, which contrasted with last year when shops responded to dismal weather with deep price cuts. Food costs also edged higher as 11 of the ONS’s 12 broad categories of goods and services registered price increases.

The inflation figures were accompanied by alarming signals from the housing market as UK average prices leapt 10.5 per cent in the year to May – with London prices up a record 20.1 per cent on last year.

Video: Chantico Global chairwoman on Janet Yellen's testimony

The Bank of England’s Governor Mark Carney stressed to MPs on the Treasury Select Committee that the timing of the first interest rate rise would be “driven by the data”, adding that the latest rise brought the cost of living into line with the Bank’s May quarterly forecasts.

But the latest data comes against the backdrop of a buoyant jobs market and an economy growing at its fastest annual pace since 2007. “Given the solid economic outlook, we see a 60 per cent chance that the Bank will begin gradually hiking rates in November this year,” said Rob Wood, the chief UK economist at Berenberg.

David Tinsley, an  economist at BNP Paribas, added that the figures could disturb the increasingly fragile consensus on the Bank’s Monetary Policy Committee, with more hawkish members tempted to vote for rate rises. He said: “It’s hard not to conclude that this looks like a good, old-fashioned UK inflation shock. If it persists in coming months, it can only intensify the debate on the MPC.”

Ms Yellen’s testimony stressed signs of “significant slack” in the US jobs market and played down a recent pick-up in inflation. A dire winter threw the world’s biggest economy into reverse in the first quarter of the year as it shrank at an annual pace of 2.9 per cent. Ms Yellen warned: “The Federal Reserve does need to be quite cautious with respect to monetary policy. We have in the past seen sort of false dawns – periods in which we thought growth would speed, pick up and the labour market would improve more quickly, and later events would prove those hopes to be unfortunately over-optimistic. We are watching very carefully.”

The Fed is due to wrap up its money-printing programme in October but interest rates are expected to stay at between zero and 0.25 per cent until the middle of next year.

Start your day with The Independent, sign up for daily news emails
New Articles
tvDownton Abbey Christmas special
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
News
news
PROMOTED VIDEO
News
i100
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
art
News
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Arts and Entertainment
tv
Life and Style
fashion
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all