Inflation inches higher ahead of interest rates decision
Inflation inched higher in the year to August, official data has shown, adding to pressures faced by the Bank of England ahead of its interest rate decision on Thursday.
The Office for National Statistics (ONS) said consumer price index (CPI) inflation in the 12 months to August was 3.1 per cent, higher than last month’s reading of 2.9 per cent.
The ONS also said services inflation was unchanged at 3.4 per cent, a reading closely monitored by the Bank as it provides some evidence on underlying price pressures in the UK economy.
Food price inflation remained low at around 1.3 per cent while core inflation, which strips out volatile items from the consumer basket, rose by 2.6 per cent.
“Sharp price rises for petrol and diesel pushed inflation up again in August,” said Grant Fitzner, chief economist at the ONS.
“Higher airfares, particularly for long-haul journeys, also contributed to the increase. Rising crude oil and petrol prices increased the annual cost of raw materials and the price of goods leaving factories respectively.”
Chancellor John Healey said the war in the Middle East was “impacting on inflation worldwide”.
“We have taken early action to help families and businesses breathing space, by cutting tax on electricity bills, capping bus fares at £2 and lowering rates for pubs, social clubs and live music venues.”
Shadow chancellor Andrew Griffith said a rise in taxes on businesses and further regulation on employment meant costs were “being passed on to consumers in the weekly shop”.
“In difficult times, we need a serious government with a plan, not amateurs with a bunch of pet projects,” Griffith said.
Inflation outlook to unnerve Bank of England
The latest set of pricing data could send policymakers on the Bank of England’s Monetary Policy Committee a fresh alert.
Inflation has remained above the Bank’s two per cent target for over two years, leaving some hawkish officials such as chief economist Huw Pill on edge about the Bank’s mandate to maintain price stability.
Several economists have urged the Bank to look beyond an energy price shock caused by the Iran war that could push prices up further in the coming months.
City AM’s Shadow MPC voted 6-3 in favour of leaving interest rates unchanged at 3.75 per cent given wage growth had continued to slow and the labour market remained weak.
Commenting on their decisions, Barclays chief UK economist Jack Meaning said he believed inflation to peak higher than previously thought in the coming months. Capital Economics’ Ruth Gregory suggested prices could be sliding towards an “adverse” scenario laid out by the Bank in the summer.
In the circumstances the Iran war continued to disrupt trade of critical supplies through to next year, leaving oil prices at highs not seen for years, inflation could peak at around 4.5 per cent.
However, both Gregory and Meaning suggested that monetary policy remained restrictive while there was less evidence of second round effects building, which is when higher wage growth could push prices higher, and vice-versa.
“This is putting a huge amount of pressure on both the Bank of England and the government,” said Richard Carter, head of fixed income at Quilter Cheviot.
“With the Bank of England meeting tomorrow, today’s figures put a rate hike into the category of a genuine consideration, with at least one expected this year. Markets have begun to price in the potential for further rate hikes into 2027, highlighting that the UK has struggled to tame inflation recently and is not expected to do so soon this time around either.”