UK Inflation Set to Rebound to Four-Month High Amid Energy Price Swings

The upcoming UK Consumer Price Index (CPI) report is set to show inflation rebounding to a four-month high, according to economists' predictions. The report, released by the Office for National Statistics at 06:00 GMT, is expected to show a year-over-year (YoY) increase of 2.9%, surpassing the Bank of England's (BoE) forecast of 2.8%. This would be the highest inflation rate since March.

The rise in energy prices due to the Middle East war is seen as the main driver behind the expected increase in inflation. The BoE has warned that if the conflict persists, it may need to raise interest rates to combat inflationary pressures. In its July Monetary Policy Statement, the MPC voted 6-3 to hold rates at 3.75%, a more divided vote than expected.

TD Securities warns that several components of inflation are now posing upside risks to the UK's disinflation narrative. Food prices are vulnerable to a pickup due to higher fertilizer costs and adverse weather conditions, while airfare inflation could re-accelerate with airlines seeking to recover higher fuel expenses through ticket price increases. Core goods inflation is also showing signs of turning higher.