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Nov 14, 5:27 AM EST

UK inflation unexpectedly holds steady at 3 percent


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LONDON (AP) -- Inflation in Britain held steady at a five-year high of 3 percent in the year to October, just below the level that would have forced the governor of the Bank of England to write to the government explaining why prices are rising by more than a percentage point above target.

Tuesday's reading from the Office for National Statistics was unexpected. Most economists had predicted a modest increase to 3.1 percent, which would have prompted an exchange of letters between Bank Governor Mark Carney and Treasury chief Philip Hammond.

Earlier this month, the central bank raised its main interest rate by a quarter percentage point to 0.5 percent. That was its first increase in a decade and was due to the fact that inflation has spiked sharply higher since Britain voted in June last year to leave the European Union, a decision that prompted a sharp fall in the value of the pound. That depreciation had a direct impact on imports, with the cost of food rising at the highest rate in four years. Offsetting that, among other things, was heavy discounting in the household sector.

Still, the fact that inflation did not rise further will likely provide rate-setters with some relief. After all, the central bank's quarterly economic forecasts, upon which the rate hike was based upon, pointed to a further increase in inflation to 3.2 percent in October. The fact that it didn't edge up further may ease the pressure on the central bank to raise interest rates again next year, as many in the financial markets anticipate.

The pound fell after Tuesday's release, trading 0.2 percent lower at near two-month lows of $1.3092.

Even without the recent rate hike, which can dampen down inflation by choking off some demand in the economy, inflation is expected to moderate over coming months as the pound-related price increases drop out of the annual comparison.

"We're already seeing slower rises in the costs of raw materials and prices at the factory gate, which could be a sign the inflationary spike is close to an end," said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown.

"That said, it looks like it will be a slow decline from here."

The fact that inflation is expected to fall only slowly is not good news for households as price increase are set to outstrip wage rises for a while yet, not least because uncertainty over Brexit is weighing on the British economy. Though Britain is due to leave the EU, its main trading partner, in March 2019, the future relationship between the two remains unclear.

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