Energy Price Spike Drives UK Inflation to 2.9% Amid Rate Cut Hopes Fading

UK inflation has surged to its highest level in months, reaching 2.9% in the year to July. The jump was largely driven by a renewed conflict in the Middle East, which pushed oil prices back towards $100 a barrel and subsequently fed through to household energy bills.

The increase was almost entirely due to the energy component, with the uplift to the household bill price cap being the main contributor. Core inflation, which strips out volatile food and energy prices, remained steady at 2.6%, while the services measure that the Bank of England watches closely actually eased slightly.

Economists say the move has significant implications for London-listed stocks, particularly rate-sensitive sectors, but markets remain calm on the release. Felix Feather from Aberdeen argues that underlying domestic inflation pressures are actually softening, and Hal Cook from Hargreaves Lansdown points to a weakening jobs market as another reason for the Bank of England to keep rates on hold.

Both Aberdeen and Hargreaves Lansdown expect the Bank of England to sit tight despite inflation running above its 2% target. Investors will be watching upcoming labour market and services inflation data closely for any sign that the energy-driven spike is spreading into wages and core prices.