FTSE 100: 7682.27 ▲ 125.83 (1.67%)
The pound has jumped and the FTSE 100 has fallen after inflation rose to 2.9% in August, further squeezing household finances.
The consumer price index reading for last month marks a jump from July's 2.6% level and matches May's four-year high.
The news sparked a jump in the pound, which rose 0.8% against the dollar to $1.327. That weighed on the FTSE 100, which fell 11 points to 7,402, wiping out the index's gains from earlier in the session.
A strong pound tends to hamper the FTSE 100, whose members rely on overseas markets for around three quarters of their revenues.
Clothing and footwear prices were the biggest contributor to the jump, with women's clothing having a particular impact.
The retail prices index, which includes the impact of mortgage costs, jumped to 3.9% in August, up from 3.6% in June.
The rise in inflation will place a further squeeze on household incomes, with wage growth figures tomorrow expected to show a 2.2% increase in pay in the three months to July, meaning real incomes are shrinking.
That squeeze, coupled with an expected dropping off in inflation as the pound's heavy fall following the Brexit vote last year begins to fall out of the figures, is likely to act as a check on any push for an interest rate rise from the Bank of England.
James Knightley, economist at ING, said that while the Bank was likely to talk up the chances of a rate rise when it issues its decision on Thrusday, an imminent hike was unlikely.
'We feel that the economic uncertainty brought about by Brexit will lead the committee to hold fire until there is much greater clarity on the UK's post Brexit environment,' he said.
'The inflationary impulse from sterling's post referendum plunge will gradually fade throughout next year and there is a lack of domestically generated price pressures. Even if we do see last August's emergency rate cut reversed at some point in the next 12 months it is unlikely to mark the start of a tightening cycle.'