Sterling rises after United Kingdom inflation beats expectations

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Excluding volatile food and energy costs, the so-called core gauge increased 0.3 percent, also above forecasts for 0.2 percent.

IHS Markit's Chris Williamson said: "While the stickiness of inflation will make for itch-trigger fingers among rate-setters, the signs of the economy faltering faltering suggest there's a risk of a higher interest rate exacerbating a nascent slowdown".

Industrial output growth in December slowed to 7.1 per cent from a 25-month high growth of 8.8 per cent last month, data released by Central Statistics Office (CSO) on Monday showed. The BoE has said it expects pay growth to accelerate in 2018, and this is yet another reason higher interest rates are on the table.

The report was closely watched because it could intensify concerns about inflation and higher interest rates that helped drive the stock market into its first correction in two years.

After Britons voted to leave the European Union in 2016 the pound tanked and inflation rose as the cost of imports went up.

In January, the main upward pressure came from the cost of entrance fees to recreational venues such as zoos and gardens, for which prices fell by less than they did a year ago. However, the index is higher as compared to the level in the month of December 2016.

Economists polled by Reuters had forecast the CPI increasing 0.3 per cent in January and the core CPI rising 0.2 per cent.

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Analysts attributed a part of the robust growth in IIP to a favourable base effect.

Following the ONS announcement, sterling rose 0.3% against the United States dollar to $1.388, while the FTSE 100 was level at 7,175 points. The 12-month rate of core inflation was also flat at 1.8%.

This hawkish interpretation/turn was inspired by Carney himself, saying at a press conference after the last MPC meeting: "It will likely be necessary to raise interest rates to a limited degree in a gradual process, but somewhat earlier and to a somewhat greater extent than what we had thought in November".

"This is a disaster for households, many of which are about to be clobbered with inflation-busting increases for bills such as council tax.

We've got the U.S. CPI data being announced - that's really the next really important inflation measurement", he said.

However, some economists believe a rate rise in April or May is not a certainty because of recent surveys showing the economy's growth slowed at the beginning of the year, including the key services sector.

ONS senior statistician James Tucker said: 'Headline inflation was unchanged with petrol prices rising by less than this time previous year. That was the biggest climb in a year and is likely to fan inflation fears in financial markets.

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