UK September inflation rises to 1.0% year-on-year; highest since November 2014

Still no clues for UK economy in 2017: Strategist

The U.K.'s battered currency had a volatile morning Tuesday, after inflation data for September showed a 1.0 percent increase year-on-year, ahead of consensus forecasts for an upward move of 0.9 percent.

This was the biggest monthly increase since June 2014 and the highest level recorded since November 2014. According to the data, clothing, hotel stays, fuel for vehicles and gas prices were key drivers of the jump in inflation.

The pound jumped to a six-day high, before retreating, and then edged above Monday's close against the U.S. dollar once again.

While sterling's precipitous fall – down by over 17 percent since the EU referendum – may have played a small role in boosting these inflation numbers, much of the impact from a weaker British pound has not yet fed through to the latest figures.

Mike Prestwood, head of inflation for the Office of National Statistics told Reuters, "There is no explicit evidence the lower pound is pushing up the prices of everyday consumer goods."

Simon Dawson | Bloomberg | Getty Images

In the time since data for the September report was collected, sterling has dropped from around $1.30 to today's price of $1.2250, thereby increasing the inflationary impact of imports and hitting consumer wallets even more.

The late morning move higher in sterling on Tuesday was believed to relate to headlines suggesting the government will need the support of both houses of parliament to trigger "Article 50" to leave the EU. This was interpreted by markets as slowing down the feared rush towards a "hard Brexit", rather than the inflation data.

UK growth outlook

The pivotal role played by consumer spending in strengthening the U.K. economy has led to additional concerns over the country's growth outlook in 2017 and beyond.

Last week's stand-off between retailer Tesco and Unilever over the consumer goods group's attempt to implement a series of price increases, ostensibly on the back of sterling causing a spike in import costs, is likely to be the forerunner of many similar squabbles between domestic vendors and their suppliers faced with soaring costs.

Although Unilever has sparked a storm given many of its items are produced within the country using local materials, this doesn't diminish the very real threat that other merchants with a large foreign supply chain will be facing as the pound continues its downward march.

While September inflation data is still significantly below the Bank of England's 2 percent annual target, the sharp ramp-up in recent months and anticipation of that trend accelerating has given the U.K.'s central bank the nuanced task of finding a balance between controlling spiraling inflation and ensuring rates are not too high to choke off growth.

Kristin Forbes, a member of the Bank of England's rate-setting Monetary Policy Committee (MPC) has been among those warning of the risk of a sharp overshoot for inflation in coming years.

The Bank of England's clearly signposted next round of monetary easing is looking less certain given this dynamic and growing fears of stagflation – rising inflation combined with poor economic growth.

Speaking on CNBC, Societe Generale's Global Head of FX Strategy, Kit Juckes said, "We have been told by Bank of England MPC members, plenty of them, they're going to look through the inflation and they're supposed to."

"Mind you, we have ex-politicians telling us this morning they should get on with it and raise rates," he added.

U.K. government bonds have been dramatically affected by the jump in inflation expectations, with this believed to be a key driver in the sharp spike in yields seen since the 10-year gilt's mid-August low of 0.501 percent. These yields closed at 1.127 percent in Monday night's session.