Sterling rose 0.5% in morning trading, after it was revealed UK inflation climbed to 1% in September, a 22-month high, surpassing both 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 higher than 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 of 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 Price 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."
Investec Wealth & Investment bond strategist Shilen Shah added the long period of low inflation is over: "The combination of higher input prices -rising 7.2% in September and a higher oil price is likely to put some upward pressure on future inflation prints in the coming months.
"Governor Carney's comments last week are however a confirmation that the BoE will not react to the data, as it continues to view the currency's fall as a shock absorber to the uncertainty created by the Brexit vote."
Hargreaves Lansdown senior economist Ben Brettell said the effects of a weak pound are starting to come through more forcefully despite the ONS comments.
"However, we need to remember that sterling's drop, assuming it does not continue to plummet, is a one-off factor, which will fall out of the year-on-year calculation in twelve months' time.
"Carney indicated last week that the MPC would ‘look through' what should be a temporary bout of inflation and keep monetary policy loose to support the economy. In the aftermath of the financial crisis the Bank of England was prepared to tolerate a spike in inflation to more than 5% while leaving rates at rock bottom.
"The bigger picture is that structurally there are very few inflationary pressures - due in part to demographic reasons. The baby boomers are starting to retire in their droves. The generation behind them is saddled with debt and struggling to get on the housing ladder, while wage growth is seemingly set to remain depressed.
"All this should mean less inflationary pressure, lacklustre economic growth, and little upward pressure on interest rates."
AJ Bell investment director Russ Mould said last week's Marmitegate was an indicator of things to come: "Today's rise in inflation is the first real evidence of Brexit hitting people's wallets as the price of restaurants, hotels, transport and alcohol starts to rise, taking headline consumer price inflation to 1.0% year-on-year, the fastest rate of growth since November 2014," says .
"Marmitegate was the sign of things to come as the cost of imported goods and raw materials from abroad increases due to the weak pound and this could lead to further price rises over the coming months.
"This would have a real impact on the spending power of people's salaries and could be the first time they have felt any pain from the vote to leave the EU."
The chairman suggests there was a lot of rocking going on that night
Alternatives unlikely to perform well
‘Exciting solution for advisers’
Seven ‘off-the-shelf’ options
Analysing ‘noise’ largely pointless