Inflation set to rebound after jump in energy bills

UK inflation is expected to swing back above the Bank of England’s target due to higher energy prices.

The Office for National Statistics (ONS) will unveil the latest monthly Consumer Prices Index (CPI) reading on Wednesday morning.

The data is expected to show a significant rebound in inflation in October after it dropped to a three-year-low of 1.7% in the previous month.

The economic data – which shows how much the prices of goods and services have increased or decreased – is predicted to reveal inflation of 2.2% for September, according to a consensus of economists.

Price cap

This would see it return to the level witnessed in July and August, and would be in line with recent forecasts by the Bank of England.

Economists have said an increase is likely to have been driven by higher energy bills after an increase in the price cap for households last month.

In October, average household energy bills increased by £149 a year after regulator Ofgem raised the cap from £1,568 for a typical dual fuel household in England, Scotland and Wales to £1,717. This represents a roughly 10% rise.

Motor fuel

Economists at Pantheon Macroeconomics have also suggested that a predicted rebound in air fares will contribute to a higher rate of inflation.

The increases will be slightly offset by a fall in motor fuel prices and an easing in food inflation, the experts added.

The inflation data for October is therefore likely to surpass the 2% target rate for inflation set by the Bank of England and the Government.

This could put some pressure on hopes that policymakers at the central bank will continue to cut interest rates, after reducing the base rate to 4.75% earlier this month.

High interest rates have been used by the Bank of England to put pressure on spending demand from consumer and businesses and help bring down inflation, after it soared as high as 11.1% two years ago.

Rate-setters on the Bank’s monetary policy committee (MPC) have since voted on two occasions to reduce rates after bringing inflation down to target levels earlier this year.

It comes as a raft of economists have reduced their predictions for interest rate cuts over the next year, with some indicating policy measures in the Budget could contribute to increased inflation in the short term.