There was an increase in UK consumer prices of 0.2% for September, which pushed the year-on-year rate to 1.0% from 0.6%. This was the highest annual increase since November 2014 and also slightly above the expected rate of 0.9%. Given Sterling depreciation and important base effects, the rate will continue to increase steadily and possibly sharply over the next few months.
The core annual inflation rate also increased to the highest level for two years at 1.5% from 1.3% and was also above the expected rate of 1.4%. There was an increase in the RPI inflation rate to 2.0% from 1.8%.
There was upward pressure on prices on a monthly basis from clothing, overnight hotel stays and fuel. There was, however, a monthly decline in prices for air fares and food.
Food prices will be an important short-term focus with the decline in Sterling likely to have a significant impact in raising prices as currency weakness gradually feeds through into retail prices.
There will also be further upward pressure on fuel prices, especially if oil prices maintain a firm tone.
Producer price inflation was subdued, which should have an impact in curbing consumer price increases.
Monthly prices increases were very limited in the final quarter of 2015 and fell sharply in January 2016 as energy prices declined. This base effect will continue to have an important impact in pushing the year-on-year rate higher even if actual price increases are still relatively subdued in the short term.
Sterling moved higher on release before retreating once again as there had been some expectations of an even stronger number. GBP/USD edged back below 1.2250 as EUR/GBP found some support below the 0.9000 level.
After trading higher into the release, gilts lost ground following the data, although moves were limited, while the FTSE index maintained a solid tone and remained higher by over 1.0% on the day.