Inflation jumped in July, official data has suggested, creating a dilemma for Bank of England officials ahead of its 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 claiming inflation would be 3.8 per cent.
Services inflation was 5.2 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 largest 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 rates 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.
Interest rate cuts hinge on falling inflation
Any decision to cut interest rates partly hinges on inflation and jobs market data over the coming months and whether forecasts come to light.
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.
Drops in the number of payrolled employees have begun to ease in recent data though 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.
Bank officials may also be nervous about Reeves’ next set of fiscal policies 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.