Sterling edges up as inflation rises to highest in 1-1/2 years

By Samuel Indyk

LONDON (Reuters) -The British pound rose marginally against the dollar and euro on Wednesday after data showed inflation hit its highest in 18 months in July, with markets not fully pricing the next rate cut from the Bank of England until well into next year.

The headline consumer price index increased to 3.8% from 3.6%, official data showed, while inflation in the services sector, which is closely watched by the BoE, accelerated to 5% from 4.7% a month earlier.

Economists surveyed by Reuters had expected headline inflation at 3.7% in July, while the BoE had forecast it to rise to 3.8%.

The biggest contributor to July's inflation rise came from transport costs, particularly air fares.

"What is really striking is that its the volatile air fares component that was driving the majority of the topside surprise," said Danske Bank FX analyst Kirstine Kundby-Nielsen.

"It's something that is more volatile and something that the Bank of England doesn't necessarily put too much weight on."

The pound rose 0.1% against the dollar to $1.3501. The pound was also up 0.1% at 86.18 pence per euro.

The BoE cut its bank rate earlier this month but only after a tight 5-4 vote, with a large minority on the rate-setting Monetary Policy Committee (MPC) worried about sticky price pressures.

The next 25 basis point rate cut is not fully priced until March 2026, while a move by the end of the year is about a 50-50 chance.

"The MPC may look for more patience going forward as it grapples with an uncomfortable trade-off: high near-term price momentum versus sluggish labour market data," said Sanjay Raja, chief UK economist at Deutsche Bank in a note.

(Editing by Alex Richardson)