Sterling falls, UK CPI surge raises econ concerns

LONDON, May 13 (Reuters) - Sterling approached a near three-month low against the dollar on Wednesday after a surge in UK consumer prices underlined concerns that high inflation is further choking an already limp economy.

British 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. Click on [nONS003519]

Despite evidence that inflation continues to press higher, the data did little to change the market's belief 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 UK housing price balance in 30 years and falling retail sales [ID:nL12319505], and a warning that domestic builders' results are being hit by the weak housing sector. [nL13413569]

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 the UK currency -- and by extension sterling -- in the longer term, as runaway prices could compromise economic growth.

Sterling was down 0.6 percent at $1.9460 <GBP=> at 1030 GMT, having stumbled as low as $1.9453 from a session high of $1.9594 hit immediately after the CPI figures. The pair treaded close to $1.9441 hit on Monday for the first time since late February.

The euro was unchanged at 79.45 pence <EURGBP=>, recovering from a session low of 79.16 pence touched after the CPI data.