Government figures showed consumer prices rose 0.6 percent in December, taking the annual rate to 2.9 percent from 1.9 percent in November, the biggest monthly rise in the annual index since records began. A rise to 2.6 percent had been forecast. The reading also exceeded the BoE's 2 percent inflation target.
Analysts said the data, along with other strong indicators in the past week, supported the case for the BoE to cease buying domestic assets from the market to stimulate the economy. By 1429 GMT, the euro traded at 87.35 pence, near 87.30 pence hit earlier in the day, its weakest since mid-September. This helped to push sterling as high as 81.5 against a currency basket its strongest in two months.
The euro fell more than 0.8 percent on the day versus sterling, falling decisively below its 200-day moving average around 88.40 pence, in what analysts said was a sign the single currency may remain weak versus the pound. A weak German economic sentiment poll stung the euro, which has suffered in the past week due to escalating concerns about the bloated debts of euro zone member Greece.
Sterling climbed as high as $1.6459 following the UK CPI data to a level not seen since early December, before pulling back to around $1.6360, up 0.2 percent on the day. Traders said the pound was drawing support from an announcement that Kraft had agreed a recommended take-over deal for Cadbury for around 11.9 billion pounds, which would create the world's top confectioner.
Buoyant data on the UK housing market, industrial production and retail sales have boosted sterling in the past week or so, luring investors who have become jittery about debt levels the eurozone and question the strength of the US economy.