Sterling hit 1.1281 against the euro and 1.327 against the US dollar, as the cost of living in the UK, hit three per cent for the first time since 2012, as measured by the Consumer Prices Index.
It means Bank of England Governor Mark Carney will be forced to write a letter to the Chancellor explaining why inflation is now one per cent above the two per cent target.
Higher inflation raises the chance of policymakers hiking interest rates next month, which in turn has strengthened the pound.
The base rate has been at 0.25 per cent since last year, but policymakers have said that if the economy continues on the same path, rates will soon need to rise.
Higher interest rates helps keep inflation in check.
Inflation was pushed up by higher food and recreational costs, according to the Office for National Statistics (ONS).
Maike Currie, investment director for personal investing at Fidelity International, said: “Inflation climbed to 3 per cent in September – up from 2.9% in the preceding month.
“With price rises now one percentage point above the Bank of England’s 2 per cent inflation target, governor Mark Carney will be penning a letter to the Chancellor explaining why inflation is so far above target.
“But this will be cold comfort to cash-strapped consumers, as today’s inflation figure marks the biggest squeeze on UK households in five years – inflation has not been at this level since April 2012.”
Markets will also be paying close attention to Mr Carney’s appearance before the Treasury Select Committee today, with the Governor likely to be questioned about inflation and interest rates by MPs.
Michael Hewson, chief market analyst, at CMC Markets, said: “As it is several members of the MPC have signalled that rates could move in the coming months and while we’re hearing some stark warnings about the risks of reversing last year’s rate cut, the bond markets have already made the adjustment and already priced it in.
“Not raising rates now, having led the markets up the garden path on several occasions over the years would be as equally damaging to the banks credibility.
“Quite simply if Governor Carney cries wolf once more it would be difficult to take him seriously again.
“We will have the opportunity to gauge his reaction to this morning’s inflation numbers, as well as his MPC colleagues Silvana Tenreyro and Deputy Governor David Ramsden when all three of them testify to MP’s at the Treasury Select Committee.”
More to follow…
Source : EXPRESS