LONDON, May 18 Reuters The pound fell against the dollar on Wednesday after data showed British inflation rising to 9, the highest level in 40 years.

At 0846 GMT, sterling was down 0.9 against the U.S. dollar at 1.23820 .

The drop reverses most of the gains made on Tuesday when the pound touched its highest level since May 5.

Strong labour market data had boosted expectations that the Bank of England would have to further increase interest rates, but the latest inflation numbers are fuelling fears that the threat of recession may temper how far the central bank can go.

Yesterday it looked like with wage growth rising and unemployment so low it meant that the bank had more room for manoeuvre, said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Now the eye wateringly high costs for consumers is going to lead to dropping consumer spending power which will have a deep impact on output in the UK economy.

Consumer price inflation hit 9 in April, making Britain39;s inflation rate the highest of Europe39;s five biggest economies and almost certainly the Group of Seven countries, with Canada and Japan yet to report figures for April. Neither are likely to match Britain39;s price growth. 

Of course the bank doesnt want to be so aggressive that it pushes the UK into a deep downturn, but it knows it needs to pull some levers to try to keep a lid on inflation, said Streeter.

The fact that the U.S. Federal Reserve is expected to act more…