Inflation jumps higher than expected

UK inflation has jumped higher than economists had expected as prices rose by 3.6%, the Office for National Statistics (ONS) has said. 

The ONS says the rise was driven by motor fuel and food costs, with food price inflation increasing for the third month in a row. 

The figures mean an interest rate cut in August is less likely. 

Richard Heys, acting chief economist at the ONS, said: “Inflation ticked up in June, driven mainly by motor fuel prices which fell only sligthly, compared with a much larger decrease at this time last year.

“Food price inflation has increased for the third consecutive month to its highest annual rates since February of last year.”

The Bank of England expects inflation to peak at 3.7% before falling back to its 2% target. 

Paul Noble, CEO of Chetwood Bank, said: “Further bad news for the Chancellor following the surprise shrinking of the economy last month. The best-laid plans of Number 11 still aren’t bearing fruit, and while I was relieved to see the U-turn on cutting the cash ISA tax free allowance, it’s not likely last night’s Mansion House speech will have lifted the public’s spirits. 

“While there is no clear path to fix our predicament, the prospect of further pinching and hiking from the chancellor is making people up and down the country wince. The cost of living continues to spiral, and nothing that is being done seems to make a difference.

“With Andrew Bailey suggesting bigger cuts might be coming if the job market continues to suffer, Britons will have to rely on themselves to protect the value of their savings from this latest jump in inflation. Make sure every penny you have is working as hard as possible to improve your financial wellbeing, not gathering dust in your current account.”

James Burgess, Head of Commercial and Insolvency expert at Atradius UK, said:

“An uptick in inflation will no doubt reignite concerns about further monetary tightening, especially as businesses continue to feel the pressure from prolonged high interest rates and subdued demand. Rising costs for raw materials, wages, and energy are squeezing margins, particularly for SMEs operating on tight budgets.

“In such an uncertain environment, businesses must act decisively to mitigate financial risk. Strengthening cash flow, enhancing supply chain visibility, and leveraging trade credit insurance are key strategies to build resilience and maintain trading confidence.”

Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA, commented:

“This is a reminder that while price rises have slowed from the highs of 2021-23, the battle against inflation is far from over and there is no return to normality yet – especially for many households who are still feeling the squeeze on essentials such as food, energy, and services.

However, while the Bank of England is expected to take a cautious approach to interest rate policy, we still expect a cut in interest rates when the Monetary Policy Committee (MPC) next votes on 7th August. Despite inflation at 3.6% remaining above the official 2% target, a softening labour market – slowing wage growth and decreasing job vacancies – means that the MPC will predict inflation to begin falling as we head into the new year, justifying the lowering of interest rates.

The bigger question on the economic horizon now lies with the Chancellor as the road to the Autumn Budget continues. The OBR’s July report highlighted that the cost of the state pension triple lock is mounting – given that the triple lock guarantees an annual rise in the state pension of the highest value between CPI inflation, average earnings growth, and 2.5%, sticky inflation threatens to keep this cost rising.

This raises concerns over how long the triple lock can remain intact. With economic growth still sluggish – just 1% forecast for the year as a whole – the Government has little wriggle room for manoeuvre. We head towards a Budget where the Chancellor will need to reconcile tax revenues and public expenditure. If she cannot do it through spending cuts (such as to pensions) then we are very likely to see tax rises.

She could always break her self-imposed fiscal rules, but her commitment to these has been steadfast. The Chancellor faces a dilemma – does she break her self-imposed fiscal rules, break a pre-election promise not to raise taxes, or take on her own party with an aggressive cost-cutting strategy?”

Accountants and business advisory firm MHA has Scottish offices in Edinburgh and Aberdeen.