Inflation shock sends pound lower

Inflation shock sends pound lower

The pound fell further against other major currencies as the latest figures showed inflation falling to its lowest level in five years.

CPI annual inflation – the Government’s target measure – fell to 1.1% in September well below the target of 2% and sharply lower than the 1.6% level registered in August, according to Official data. This was the lowest annual rate of inflation since September 2004.

Dipping to levels not seen for more than six months, sterling hit a low of €1.0627 against the euro, marking its lowest ebb since late March against the single European currency. This means one Euro is worth 93.8p, at the wholesale rate.

The pound also dropped sharply against the dollar to four and half month lows, back under the $1.58 level at $1.5722 at its lowest point.

'The pound is lower against the dollar which itself is also lower against other major currencies amid worry about the level of future debt issuance,' said Manus Cranny, head of sales at spread better MF Global.

He said this adds to downward pressure, as does the increasing certainty that interest rates are going to stay low, adding to the attractiveness of other currencies such as the Australian dollar. Australia raised its interest rates last week.

The largest downward pressure on inflation was gas and electricity bills, which were unchanged between August and September this year but rose a year ago. Falling food prices also weighed.

Duncan Higgins, senior analyst at Caxton FX, said: 'This is bad news for the pound. The CPI figures will weigh heavily on the UK currency and will continue to discourage investment.'

He said the pound is now on now on course to fall to parity with the euro, particularly as the euro zone continues to issue positive economic updates.

Economists agree though inflation has troughed and echo comments from Mervyn King that it will not fall as low a 1% this year. A number of economists now suggest inflation could be back at the 2% target by the end of the year.

The fact that oil prices fell so sharply at the end of last year will put a floor on inflation, they say.

But further out the picture looks more mixed and some still believe the deflation beckons in 2010.

The retail prices index fell by 1.4% in line with the level seen in August. This measure excludes housing costs.

The inflation measure - which is used to set salaries - had contracted by 1.6% in the year to June

citywire.co.uk