Pound falls after CPI surge raises economic concerns

LONDON (Reuters) - Sterling hit its lowest level in nearly three months against the dollar on Wednesday after a surge in consumer prices underlined concerns that high inflation is further choking an already limp economy.

Consumer prices surged 0.8 percent in April from March, far exceeding expectations for a 0.5 percent rise, and taking annual inflation to 3.0 percent.

Despite evidence that inflation continues to press higher, many in the market believe that the Bank of England will continue to cut interest rates as it tries to combat economic weakness spilling over from the ongoing global credit crunch.

The pound was also hurt by data showing the weakest housing price balance in 30 years and falling retail sales, and a warning that builders' financial results are being hit by the weak housing sector.

Sterling's initial rally on the CPI data quickly fizzled out, knocking it roughly half a percent lower against the dollar as investors reckoned inflation risks alone would not stop the central bank from cutting rates, which would erode the pound's yield appeal.

"The issue for sterling is that inflation is high, but the BoE can't hike," said Bilal Hafeez, global head of forex strategy at Deutsche Bank.

He added that inflationary pressures could be negative for sterling in the longer term, as runaway prices could compromise economic growth.

Sterling was down almost 0.7 percent at $1.9439 by 3:41 p.m., its lowest since late February.

The euro rose slightly to 79.52 pence, recovering from a session low of 79.16 pence touched after the CPI data.