Inflation may cause rate increase in UK

The British Pound is continuing its run against the USD, as investors and traders anticipate a rise in UK interest rates. Newly released inflation data indicates that prices are increasing at a faster pace than interest rates, due to surprising strength in Britain's economy. At last month's meeting of the UK central bank, only one member voted to raise rates. At the time, the other members were confident that interest rates accurately reflected inflation expectations, and voted not to change rates. In response to this new development, they may be forced to act. Economists, however, are quick to point out that much of the rise in prices can be attributed to rising transportation and energy costs, and may not be an accurate metric of general economic performance. The Financial Times reports:

A senior forex strategist said that inflation was just 1.3 per cent if energy and transport costs were stripped out. He argued that the Bank would be unlikely to hike rates in response to an energy shock unless there was evidence of this feeding through into second-round effects such as higher wage growth.

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