Inflation approaches 3 per cent as higher energy bills bite – with more to come in the autum

CPI inflation rose to 2.9 per cent in July, up from 2.6 per cent in June, driven by July’s higher energy price cap, with further rises in inflation likely later this year. While widely anticipated, this uptick is unwelcome news for families, mortgagors and the Government – the Resolution Foundation said today (Wednesday).

Today’s higher inflation reading is particularly unwelcome for families struggling with huge rises in the cost of essentials but will also disappoint interest rate setters at the Bank of England who had been expecting a smaller rise to 2.8 per cent. This is bad news for mortgagors hoping for lower rates, and also for a Government trying to deliver an ambitious cost of living agenda while debt-servicing costs remain historically high.

The rise was driven largely by July’s increase in the Ofgem energy price cap, which added around 0.4 percentage points to headline inflation. Higher gas costs were partly offset by falling petrol prices, down 3.1 pence per litre in July but not enough to cancel out costlier home heating.

There was some good news in the form of lower-than-expected food price inflation as prices remained steady on the month. There was also continued progress on underlying inflation, with services price inflation easing to 3.4 per cent in July (from 3.6 per cent in June) – a sign that the domestically-generated price pressures are still easing.

Crucially, this renewed bout of inflation is largely the product of events beyond the Government’s control, with tensions in the Middle East keeping wholesale energy prices high. Given an uncertain outlook, the Government should be ready with a scheme of targeted support if prices climb further.

Inflation is expected to peak at around 3.2 per cent around the end of the year, still far below the highs seen at the height of the cost of living crisis, but a challenging outlook for Chancellor Healey’s first Budget in October.

James Smith, Chief Economist at the Resolution Foundation, said:

“Inflation is back on the rise, climbing to 2.9 per cent in July largely due to higher energy bills. With more increases to come – this is unwelcome news for families, mortgagors and the Government alike.

“The good news is that underlying pressures are still easing, with services inflation continuing to fall. The bad news is that this fresh bout of inflation is being driven by events in the Middle East that are largely beyond the Government’s control.

“At today’s energy prices the Government should not be looking to provide large-scale blanket support, but it should be ready with targeted support if bills climb further this autumn.”