Surging energy prices push inflation up to highest level since March

Bryn Jones, head of fixed income at Rathbones Asset Management, is waiting to see whether energy costs could “feed through into wages and broader pricing behaviour”.

He said: “UK CPI rose 0.3 per cent month-on-month in July, in line with expectations, taking the annual rate to 2.9 per cent from 2.6 per cent. RPI was softer than forecast at 0.6 per cent on the month versus 0.8 per cent expected, with the annual rate at 3.2 per cent.

“The increase in headline inflation was largely driven by housing and household services, particularly gas and electricity, following the July increase in the Ofgem energy price cap. This pressure is unlikely to disappear immediately and could remain visible in the next few inflation releases.

“However, the underlying details were more reassuring. CPI services inflation eased to 3.4 per cent from 3.6 per cent, in line with expectations, while core CPI remained unchanged at 2.6 per cent. This should provide the Bank of England with some comfort that second-round inflationary effects are not becoming unduly entrenched.

“The labour market is also continuing to soften. Yesterday’s employment data showed that private-sector regular pay growth slowed to 2.8 per cent year-on-year in the three months to June, its weakest pace since 2020. Unemployment remained at 4.9 per cent, while vacancies continued to decline.

“Overall, the data present the Bank with a mixed picture. Headline inflation has risen because of a renewed energy shock, but the softer services and private-sector wage figures suggest that domestic inflationary persistence is continuing to moderate.

“The key question is whether higher energy costs ultimately feed through into wages and broader pricing behaviour. Given the weakness in the labour market, that pass-through may prove relatively limited.

“The potential impact of El Nino-related weather disruption on food and commodity prices remains uncertain, but it represents an additional supply-side risk rather than clear evidence of renewed domestic inflation pressure.”