Benign Food Prices Keep UK Inflation in Check

Despite rising energy prices and social rents, UK inflation remains unexpectedly low, according to recent data from ING Think. Headline inflation rose by three-tenths of a percentage point to 2.9%, primarily driven by household energy bills and rent increases. However, food prices remained flat, which is highly unusual.

ING analysts attribute this benign food inflation to the fact that it takes time for producer price movements to filter down to consumers. They note that consumer food inflation could potentially even turn negative in annual terms over the next few months, but this seems unlikely.

The news was not entirely welcome on services inflation, which dipped slightly due to low air fares readings. However, excluding volatile categories, core services inflation actually increased. Overall, the data suggests that the war in Iran has had little tangible impact on UK inflation so far.

ING expects headline inflation to peak at 3.2% next winter, well below the threshold for a Bank of England rate hike. They predict that the central bank will maintain its current policy of keeping rates on hold this year and resuming rate cuts in spring 2024.