Inflation at a 10-year high of 4.2% makes for uncomfortable reading and goes to show the punishing effects of higher energy and food prices on family finances. It almost certainly means the Bank of England will raise interest rates soon, potentially as soon as next month.
Russ Mould, investment director at AJ Bell, said: “The prospect of higher rates has given some support to the pound, but the movement is only mild which suggests that rising inflation is a surprise to no-one. Sterling gained 0.1% against the US dollar at $1.3440.
“What really matters to markets is the scale of any interest rate hikes over the next year, and that will be guided by the longevity and ferocity of inflation. There is a real chance that rates keep going up by small increments and after a while this starts to make life more difficult for consumers and companies as the cost of borrowing becomes more expensive.
“The FTSE 100 dipped 0.2% to 7,310 as the small strength in the pound is bad for the large number of companies who generate their earnings in foreign currencies.
“NatWest and Lloyds were among the biggest risers on the FTSE as the banking sector should be a beneficiary of rising interest rates. It creates scope for them to increase net interest margins which is the difference between the interest they earn on loans and the interest they pay on savings deposits.”