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UK CPI rises to 1.8%

The latest inflation numbers showing a rise to 1.8% (from 1.6%), with the market expecting 1.7%. Also of note is the fact that core inflation has moved up from 1.6% to 2.0%. This excludes more volatile items, such as food and energy. The average for the past 5 years has been 2.4%, but this has been a time of notably higher inflation, so not much comfort should be taken from this.  The issue with inflation is that the Bank is relying on the amount of slack in the economy to act as a restraining force. This was also the case in the early part of the financial crisis, but this downward pressure failed to materialise and offset the inflationary forces elsewhere that took headline inflation to above 5% in 2011.  There are real risks that the Bank is wrong-footed again, given that measuring spare capacity is hard at the best of times and knowing how it will develop in the future and impact inflation is even harder.  Sterling was firmer ahead of the numbers, rising to above 1.6850 on cable, but has subsequently pulled back on the release, back towards European opening levels of 1.6820/25.

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