UK inflation has increased to 2.9% in the year to July from the previous figure of 2.6%. This is the highest rate for 4 months and is predominantly a result of higher energy prices.
The reasons why inflation has increased
The main reason behind the jump in inflation is the increase in energy prices. On 1st July, the price cap for household gas and electricity bills was raised by 13%. The energy price cap had to be changed as prices have surged since the Middle East conflict began. Gas prices have increased at the highest rate in nearly 4 years.
Another contributing factor is that furniture prices fell by less than they usually do for the same time of year. Clothing prices also fell less due to reduced discounting.
Food inflation, on the other hand, has slowed. Food prices are still increasing at 1.3%; however, the latest figures show that they’re increasing at the lowest rate in almost 5 years.
Fuel prices have also slowed, having lowered to 15.5% in the year to July from 21.3%. The average price of diesel fell to 167.6p per litre while petrol fell to an average of 152.2p per litre.
The effect on interest rates
The next review of the Bank of England’s base rate is to be held on 17th September. Currently sitting at 3.75%, economists aren’t expecting it to change just yet, despite the increase in inflation.
Further energy-related costs, however, are expected to push inflation higher later in the year. There are also concerns that food price inflation may rise as a result of the current drought. If crop yield shortages continue and agricultural costs increase, these higher costs may eventually be passed on through supermarkets. And there are still concerns about the ongoing Middle East conflict.
For now, though, a weak labour market may be adequate to keep the base rate as it is rather than hiking it in an attempt to reduce inflation.
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