Inflation ticks up to 3.6 per cent, with further rises expected come autumn

CPI inflation exceeded expectations to reach an eighteen-month high of 3.6 per cent in June – 0.2 percentage points higher than expected – while forecasts from the Bank of England have inflation rising further in the autumn, continuing to weigh down on lower-income households struggling to cope with higher prices, according to the Resolution Foundation today (Wednesday).

The unforeseen rise is largely driven by transport, primarily due to increases in the cost of fuel which is pushing up on the rate of inflation by 0.1ppts compared to May. At the same time, the contributions from cost of restaurants and hotels and housing and household services fell, but not significantly enough to keep the headline rate of inflation from rising.

Alongside the rising price of fuel, household energy costs have continued to stretch budgets for low-and-middle income households. By the dawn of the pandemic, the cost of gas and electricity had risen by 150 per cent in real terms since the early 2000s. The sudden spike in energy prices brought on by Russia’s invasion of Ukraine meant it took less than four years for those elevated energy costs to double again, meaning low-to-middle income households spent 11 per cent of their budgets on energy bills in 2022-23.

The path for energy prices remains somewhat uncertain moving forward. While the energy price cap fell by 7 per cent at the start of July, the drop should have minimal impact on bills, falling as it does in the summer when energy use is lowest.

Indications of a slowdown in the jobs market (possibly confirmed in tomorrow’s labour market data from the ONS) may create more space for the Bank to cut rates faster, although with both headline CPI and services inflation higher than the Bank expected last month, the prospect for rate cutting remains uncertain. Even if rates come down, low-income households will continue to struggle to manage higher prices as the rate of inflation remains 1.6 per cent above target.

Lalitha Try, Economist at the Resolution Foundation, said:

“CPI inflation unexpectedly reached 3.6 per cent in June, an eighteen-month high and 0.2 percentage points higher than forecasters were expecting.

“July saw a 7 per cent fall in the energy price cap, but with only a fraction of energy use happening over the warmer summer months – and energy bills still double what they were on the eve of the pandemic – lower-income families will continue to struggle to pay energy bills in the coming months.

“While a potential slow-down in the jobs market could be good news for (some) mortgagors – but bad news for workers – if it allows the Bank to cut rates further and faster, inflation remains 1.6 per cent above target which will slow the pace of future rate cuts.”