UK inflation has risen as forecast to 2.9% for 12 months to July, driven by higher energy prices, the Office for National Statistics (ONS) has announced.
The rise compares with the rate of 2.6% for the year to June and is largely a result of nergy regulator Ofgem’s 13% increase in the price cap on household gas and electricity bills which came into force on 1 July.
The cap initially sheltered consumers from the surge in energy prices following the outbreak of the Middle East conflict.
Investec economist Ellie Henderson said the cap rise alone will have added 0.5 percentage points to inflation for July.
Richard Neudegg, director of regulation at Uswitch.com, said: “Households holding out for a last-minute reprieve on rising energy bills look set to have their hopes dashed, with predictions suggesting a 4% increase in the October price cap.
“With continued instability in the Middle East, higher energy costs are now looking very likely throughout winter as a third consecutive price cap hike is predicted for January.”
Last month, the governor of the Bank of England, Andrew Bailey, said a rise in inflation was expected this year because of volatile oil and gas prices caused by the continuing conflict.
Inflation eased earlier in the summer during a brief lull in hostilities between the US and Iran.
Despite recent government measures to reduce the cost of living, such as discounted leisure activities this summer and the cut in VAT on electricity bills from October, Deutsche Bank expects UK inflation to peak at around 3% this year, before easing to 2.4% next year.
July’s data will inform the Bank of England’s next move on interest rates at its 17 September meeting, after leaving rates unchanged at 3.75% so far this year.
Markets are currently pricing in a small chance of a rate hike at next month’s gathering of the Monetary Policy Committee, though a single increase to 4% is expected by some analysts by the end of the year.
Felix Feather, economist, at Aberdeen said: “So far markets are largely undisturbed by the stronger headline, retaining an expectation for some modest tightening of Bank of England policy.
“Given evidence of a slowdown in underlying domestically generated inflation (as opposed to more internationally driven goods such as energy commodities) and soft labour market conditions, we see the Bank on hold for the rest of the year.”
Martin Sartorius, lead economist at the CBI, said: “The rise in inflation, which was [broadly] in line with the Bank of England’s expectations, means that the Monetary Policy Committee remains on track to keep rates on hold at its next meeting.”
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