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Concerns over inflation resurfaced today after a shock rise in prices at the factory gate.
Official figures showed the price of goods leaving British factories increased 0.5% in September in the first rise in five months.
It stunned the City, where analysts expected prices to fall, and raised fears that rising rather than falling inflation is a threat to the economy.
George Buckley, chief UK economist at Deutsche Bank, said: “You could see inflation start to pick up again in the early part of next year.”
It put pressure on the Bank of England ahead of next month's key decision on interest rates and quantitative easing. The Bank has slashed rates to 0.5% and is pumping £175 billion of newly printed money into the economy to stimulate growth and stave off deflation. Richard McGuire, of RBC Capital Markets, said: “The UK inflation backdrop might not be as benign as expected.”
Economists are split over whether the Bank will increase QE next month when the current money runs out, or put the programme on hold.
“This reduces the probability of an increase in QE next month,” said Philip Shaw at Investec.
But the pound fell against the dollar and the euro as traders bet the Bank will leave rates at their all-time low for some time and ramp up QE.
The dollar was also buoyed by Federal Reserve chairman Ben Bernanke, who said rates in the US will rise when the economy improves.
Figures today showed the weak pound helped narrow the UK trade gap from £6.4 billion to £6.2 billion in August as exports to Europe increased.
