According to a forecast by a major economic consulting firm, inflation will rise to 2.9 percent by November.
Capital Economics had previously indicated that the renewed rise in inflation later this year would not be as sharp as some other forecasters had predicted.
But the announcement last week by the UK energy regulator Ofgem that the energy price cap would rise by 10 percent to £1,717 a year for a typical household has dashed that prediction.
In addition, there is a “high risk” that collective agreements in the public sector “set a benchmark for private sector companies and keep wage and service inflation high”.
The forecaster said he had expected wholesale gas prices to fall this year and therefore did not predict the 10 percent increase in the energy price cap.
“Instead of remaining just above the two percent target for the rest of the year and falling below two percent in March 2025, we now expect consumer price inflation to rise from 2.2 percent in July to 2.9 percent in November and not to fall below two percent until June 2025,” it said in a briefing.
Inflation is currently at 2.2 percent, after the consumer price index (CPI) remained at 2 percent for two months between May and June.
Other forecasters had also previously predicted that inflation would rise significantly this year, and Capital Economics’ forecast is now more in line with those predictions.
Pantheon Macroeconomics, for example, predicts that inflation will peak at 2.8 percent in November.
UK chief economist Rob Wood said: I that Ofgem’s price cap had not changed as its forecasts “already included a 10 percent increase in October.”
The higher inflation figures could lead the Bank of England to cut interest rates more slowly than expected, something it usually does when inflation returns to target levels.
Capital Economics said: “We continue to expect interest rates to be cut from the current 5 percent to 4.5 percent this year and to 3 percent in 2025. However, our forecast is at risk as the cuts will be slower and smaller than currently expected.”
Andrew Bailey, Governor of the Bank of England, had previously stated that the impact of public sector pay increases on inflation would be small.
When asked about the issue at a Bank of England press conference this month, he said: “The proverbial back of the envelope suggests that the scope for inflation is very limited. At this point, the numbers are at quite small numbers in the second decimal range.”
Why will inflation rise?
The main reason for the rise in inflation and the associated further increase are so-called base effects.
Inflation is measured by price growth over the past year, so a large part of the figure is based on prices 12 months ago.
In April, regulator Ofgem lowered the energy price cap – the maximum amount most households pay per unit of gas or electricity consumed.
In April 2023, the amount people paid for their energy was at its highest level ever, but in July 2023 the cap fell.
So while energy prices fell dramatically in the twelve months leading up to April to June 2024, thereby pulling down the inflation rate, deflation in July is less dramatic.
Although falling energy prices have counteracted high inflation in other areas, such as the services sector, in recent months, this effect was not as strong this time.
When the cap is raised in October, this effect will be even more pronounced.
This is one of the main reasons why inflation has risen this month and is forecast to remain above two percent in the coming months.
