Inflation tops forecasts as food prices jump
Inflation jumped in July, official data has suggested, creating a dilemma for Bank of England officials ahead of the central bank’s next policy meeting in September.
The Office for National Statistics (ONS) said consumer price index (CPI) inflation hit 3.8 per cent in the 12 months to July, which is on par with the Bank of England’s estimate earlier this month of 3.8 per cent.
Services inflation was five per cent while core inflation was 3.8 per cent.
A Bloomberg poll of economists said inflation would hit 3.7 per cent in the year to July.
High price growth was driven by a “hefty increase” in air fares, which saw the most considerable July rise since 2001.
“Inflation rose again this month to its highest annual rate since the beginning of last year” said Grant Fitzner, chief economist at the ONS.
“Food price inflation continues to climb, with items such as coffee, fresh orange juice, meat and chocolate seeing the biggest rises.”
The Bank of England’s next interest rate decision will be on September 18, when it is expected to hold the policy rate at four per cent.
But economists are already looking forward to a busy November when the Bank publishes its monetary policy report and Rachel Reeves is expected to deliver the Autumn Budget.
Reeves said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.”
“That’s why we’ve raised the minimum wage, extended the £3 bus fare cap, expanded free school meals to over half a million more children, and are rolling out free breakfast clubs for every child in the country.”
Jim Bligh, director of corporate affairs and packaging at The Food and Drink Federation (FDF), said the new packaging tax and the rising cost of some commodities had combined to increase costs to food businesses.
“Manufacturers have absorbed as many of these costs as possible, but consumers will still see higher prices at the till,” Bligh said.
“We expect that high food and drink inflation will persist through the year, so any fresh costs for businesses in the Autumn Budget will inevitably put yet more pressure on shoppers’ pockets.”
Interest rate cuts hinge on falling inflation
Any decision on interest rates will hinge on inflation and job market data over the coming months.
Governor Andrew Bailey said the path of interest rates remained “downward” but was now more “uncertain” given clashing economic data on a deteriorating labour market and high inflation, which is now nearly double the Bank’s two per cent target.
The Bank of England has suggested the unemployment rate could rise from its current 4.7 per cent level to five per cent next year.
Schroders’ fixed income strategist Marcus Jennings said: “Inflation in the near term was always going to put greater emphasis on the labour market getting weaker to justify interest rate cuts. Today’s upside surprise only reiterates this further.”
Bank officials will also be watching Rachel Reeves when she delivers her next budget in the Autumn given suggestions she may have to fill a possible £50bn black hole in public finances later this year.
It said in its last report that fiscal “tightening” had dampened GDP growth while living standards were unlikely to improve in the coming years.
Reeves’ tax decisions on hiking employers’ national insurance by lowering the main salary threshold to £5,000 at last year’s Budget has forced company directors to pass on costs to consumers through higher prices, according to multiple business surveys.