XM Investment Research Desk: Producer price inflation data released in the UK today revealed the first evidence that the dramatic slide in the value of the pound has started to create upward pressure on factory input prices in the UK. Consumer price inflation was largely within estimates however, though the headline rate ticked up to a 20-month high. Input prices rose at an annual rate of 4.3% in July, beating forecasts of 2.0% and a sharp jump from -0.5% in June. This was the first time since July 2014 that the annual rate was positive. On a month-on-month basis, prices shot up 3.3% as the rising cost of imports from a weaker currency, as well as higher crude oil prices, drove up input prices for UK goods producers. Sterling has fallen by around 12% since the start of the year and hit a three-decade low of 1.2794 dollars in July as worries over the impact of the referendum decision to leave the EU intensified. The Bank of England acknowledged in its quarterly inflation report in August that the pounds depreciation will likely push up inflation above its 2% target within the next two years and this could restrict the scope of further monetary easing should economic conditions in the UK deteriorate further in the aftermath of the Brexit vote. Output (or factory gate) prices also turned positive for the first time in two years in July, rising by 0.3% year-on-year. This was above estimates of flat growth and was mostly driven by higher transport costs. The weaker pound has yet to feed through headline inflation though as the pick-up in the rate of consumer price inflation was mainly due to an increase in the price of petrol. Annual CPI rose from 0.5% in June to 0.6% in July the highest rate since November 2014. Expectations were for CPI to stay unchanged at 0.5%. Core inflation, which excludes volatile items such as food, energy and alcoholic beverages, eased from 1.4% in June to 1.3% in July, in line with estimates. The stronger-than-expected inflation data helped sterling extend its earlier gains to move further away from one-month lows against the dollar and three-year lows against the euro. The pound stopped just shy of the 1.30 level at 1.2993 dollars, while the euro briefly spiked up to 0.8724 pounds. Despite the prospect of rising inflation over the coming months, the Bank of England is unlikely to sway from the view that the UK economy will likely need further monetary stimulus over the coming months to minimize the impact of the Brexit blow. Todays rebound in the pound is therefore more likely to be a short-term correction than a longer-term recovery. However, upcoming UK data this week on unemployment (Wednesday) and retail sales (Thursday) will still be closely monitored by the markets to assess how the British economy is performing in a post-Brexit environment.