UK Inflation Inches Higher on Rising Fuel Costs

UK inflation has ticked up to 3.1% on a sharp 7% month-on-month increase in fuel costs, but there's no sign of a need for interest rate hikes just yet, according to recent data from the Office for National Statistics.

Headline inflation rose as expected due to high energy prices, which are forecast to rise by another 3-4% through September. This could push headline inflation up to 3.4% in next month's data.

However, the Bank of England is more concerned with whether the energy shock is having broader effects on other parts of the inflation basket. Currently, there's no sign that this is happening, with food inflation actually decreasing to 1.1% year-on-year and producer price data suggesting it could turn negative in the near term.

Similarly, goods and services classified as 'high' or 'very high' energy intensity have seen their inflation rate fall despite a rise in energy costs. Services inflation is also under control, with the Bank of England's 'core services' metric tracking higher than the headline services index but remaining benign due to contained wage growth.

While some might argue that this data suggests the Bank of England won't hike rates this year, others believe that if energy prices remain high for an extended period, inflation forecasts may become harder to argue against. Our base case, however, is that energy prices dip back towards year-end, with inflation peaking around 3.7% early next year.