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
ebooks
ebooksAn introduction to the ground rules of British democracy
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

Recruitment Genius: Mortgage Advisor - OTE £95,000

£40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...

SThree: Trainee Recruitment Consultant

competitive: SThree: Are you passionate about sales?Do you have a keen interes...

Recruitment Genius: Loan Adviser - OTE £30,000

£17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Day In a Page

Isis in Syria: Influential tribal leaders hold secret talks with Western powers and Gulf states over possibility of mobilising against militants

Tribal gathering

Influential clans in Syria have held secret talks with Western powers and Gulf states over the possibility of mobilising against Isis. But they are determined not to be pitted against each other
Gaza, a year on from Operation Protective Edge: A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians

Gaza, a year on from Operation Protective Edge

A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians
Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously

Illnesses, car crashes and suicides

Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously
10 best trays

Get carried away with 10 best trays

Serve with ceremony on a tray chic carrier
Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high
How to find gold: The Californian badlands, digging out crevasses and sifting sludge

How to find gold

Steve Boggan finds himself in the Californian badlands, digging out crevasses and sifting sludge
Singing accents: From Herman's Hermits and David Bowie to Alesha Dixon

Not born in the USA

Lay off Alesha Dixon: songs sound better in US accents, even our national anthem
10 best balsamic vinegars

10 best balsamic vinegars

Drizzle it over salad, enjoy it with ciabatta, marinate vegetables, or use it to add depth to a sauce - this versatile staple is a cook's best friend
Wimbledon 2015: Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Serena dispatched her elder sister 6-4, 6-3 in eight minutes more than an hour
Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?