Sterling rose 0.5% in morning trading, after it was revealed UK inflation climbed to 1% in September, a 22-month high, surpassing economists' expectations and forecasts from the Bank of England's August Inflation Report.
The Office for National Statistics (ONS) reported the Consumer Price Index (CPI) jumped to 1% in September, the highest level since November 2014 and above estimates of a 0.9% rise.
Upward pressures on the CPI came from rising prices for clothing, overnight hotel stays and motor fuels, said the ONS, although these were partially offset by a fall in air fares and food prices.
Though the weakening in the pound since the Brexit vote has been blamed for increases in retail prices, the ONS added there is no "explicit evidence" the fall in sterling is pushing up consumer prices.
The Retail Prices Index (RPI), which includes mortgage interest payments, also rose to 2% in September, up from 0.8% in August.
Following the announcement, sterling rose 0.5% to trade at $1.22340. Meanwhile, UK 10 year gilt yields remained at elevated levels after reaching a post-Brexit high last week and were trading around 1.12% this morning.
In equities, the FTSE 100 moved 1% higher to 7,022.8 points lifted by miners Randgold Resources and Fresnillo.
The ONS figures come after the governor of the Bank of England Mark Carney said the Bank would tolerate inflation exceeding its 2% target in order to boost economic growth and reduce unemployment.
UK inflation undershot expectations in August, holding steady at 0.6%, despite weaker sterling.
Capital Economics UK economist Paul Hollingsworth said the jump in UK inflation will not trouble the Bank of England's Monetary Policy Committee.
He said: "Inflation was always set to pick-up as the drag from low fuel and energy prices faded. What is more, the ONS noted that there was no 'explicit evidence' that the pound's fall was having a significant impact on consumer prices...yet.
"But the 15% or so drop in sterling on a trade-weighted basis since the referendum has put inflation on a steeper upward trajectory for the next few years."
He added: "We think CPI will breach the MPC's 2% target around Spring next year, and will peak at about 3.2% in the first half of 2018, once the direct and indirect effects of the pound's fall have had time to feed through.
"Nonetheless, this should not worry the MPC too much. Note that recent comments by MPC members including governor Carney and deputy governor Ben Broadbent have indicated they are willing to tolerate an overshoot of the target in order to focus on stabilising the economy in the short run.
"Accordingly, the latest figures do not rule out the possibility of another interest rate cut in November."
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