Soaring energy bills set to fuel inflation spike
Rising energy prices are poised to send UK inflation rearing back up, as economists warn that the summer boost to the economy could be fleeting.
The rate of Consumer Prices Index (CPI) inflation is tipped to rise to 2.9 per cent in July, climbing from June’s 15-month low of 2.6 per cent, when the Office for National Statistics (ONS) releases its figures on Wednesday.
While frequent heatwaves and the World Cup have boosted the UK’s summer economy, economists are sounding the alarm over Ofgem’s recent hike to its energy price cap.
In July, the energy regulator allowed households’ average gas and electricity bill to rise by £221, or 13 per cent, to £1,862 per year.
Ellie Henderson, an economist at Investec, said this jump in energy prices alone will add 0.5 percentage points to July’s inflation reading.
“It was already clear at the publication of the June print that any easing in inflationary pressures as per the headline measure wouldn’t last for long, with the July increase to the Ofgem energy price cap likely to erase any progress towards the Bank of England’s two per cent target,” she said.
The inflationary effect of the price cap rise will be partly offset by easing motor fuel inflation, but will still add “fresh pressure to household budgets and [complicate] the outlook for interest rates,” said RSM chief economist Thomas Pugh.
Earlier this week, UK economic growth slowed to 0.4 per cent, in what economists described as the first warning of an impending slowdown as higher prices and borrowing costs caused by the Iran war continue to filter through.
Industry figures had warned earlier this year that soaring food inflation would be a key consequence of the Middle East conflict, tipped to reach as high as 10 per cent this year.
Food inflation could yet rise
Pugh said food inflation could dip slightly in July, as lower wholesale food prices from the end of last year work into the system, before edging back up later this year.
The Food and Drink Federation said “fruit, vegetable and grain supply” are being hit by recent heatwaves, with crop shortages set to feed into supermarket prices.
Analysts at Investec have cautioned that this could be compounded by the effects of an El Nino weather event, which “risks reinforcing upward price pressures”.
Earlier this year, former Chancellor Rachel Reeves unveiled the government’s Great British Summer Savings Scheme, which cut VAT on family attractions and children’s meals until September.
Economists said this would drag on inflation slightly but not be enough to stop the headline rate moving further away from the Bank of England’s two per cent target.
Victoria Scholar, head of investment at Interactive Investor, said: “The Bank is likely to carry out roughly one 25 basis point hike by the end of the year as it looks to temper the risk of overheating and help push the inflation rate back in the direction of [its] target.”