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Inflation numbers surprise the city

Today's announcement that Consumer Price Inflation (CPI) remained unchanged at 1.8% last month surprised many people as there had been a feeling that the UK CPI figure would fall further, in line with many European and worldwide partners. There was also a chink of light with regards to the retail pricing (RPI) with the rate improving slightly from -1.6% to -1.4%. The surprise strength in both the RPI and the CPI has caused a major split amongst analysts with regards to the future direction of UK inflation.

There are a number of analysts who believe that primarily because of the increase in economic activity in Germany, France and Japan, as well as the relatively low sterling exchange rate, there is limited downside for UK inflation. However, there are still a number of analysts who believe that UK inflation will eventually fall further and those who "take their eye off the ball" in the short term may live to pay the price.

Even though sterling has been weak over the last few days the exchange rate has recovered from the substantial fall of a few months ago. If we do see further improvement in the exchange rate this is certain to filter through to both the CPI and the RPI and limit any potential downside in the immediate future.

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