Sterling sank on Tuesday as inflation’s march higher was unexpectedly halted last month, prompting predictions that the squeeze on UK households has peaked.
The Consumer Prices Index held steady at 3% in October, confounding forecasts of another rise, which would have forced Bank of England Governor Mark Carney to explain himself in an open letter to Chancellor Philip Hammond.
Despite food prices hitting a four-year high, lower petrol prices compared to a big rise at the pumps a year earlier kept the cost of living in check.
Investec chief economist Philip Shaw said: “Our central view is that inflation may well have peaked, but the big wild card is what happened to petrol prices in November.”
The pound fell immediately following the figures, dropping 0.2 cent to $1.3092 and taking an even bigger fall against the euro - down 0.68 cent to €1.1175.
The single currency was also supported by surprisingly strong growth from the powerhouse German economy.
Although Threadneedle Street is monitoring wage figures carefully, today’s numbers lessen the urgency for a swift follow-up to its first interest rate rise in a decade earlier this month.
ING Bank’s James Smith said: “Inflation looks like it has peaked and without further signs of domestically driven price pressures, the Bank of England will tread carefully.”
Household finances still remain under pressure, however. New research from KPMG showed UK consumers spending as much as 76% of their disposable income on essentials rather than luxuries — a higher share than shoppers in both the US and India.