KPMG UK comments on today’s inflation figures

“Energy prices have emerged as a key risk to the inflation outlook following the escalation in the Middle East. Oil prices have increased by more than 13% since the start of last week. The immediate impact of this will likely see prices at the fuel pumps rise, reversing the fall in petrol prices motorists were benefitting from recently.

“Gas prices have also increased by around 12% over the past week, which could see the energy price cap rise in the final quarter of this year, although there is more uncertainty given that Ofgem will set the price cap only in August. If gas prices remain at this level, this could translate into around a 3% increase in household energy bills in the autumn, adding further upward pressure to headline inflation. 

"The recent movements in energy prices add further uncertainty to an already volatile global economic backdrop. This presents another challenge for the Bank of England to navigate and tomorrow’s meeting is unlikely to result in a shift from the MPC’s cautious approach. Nonetheless, developments on the domestic front should provide some comfort, with early indications that the disinflation process remains on track despite the recent rise in labour costs.

“The continued strength of the pound against the dollar should help partially cushion the impact of higher energy prices. Provided underlying inflation continues to moderate, we expect this to pave the way for an interest rate cut in the August meeting.

“Headline inflation eased to 3.4% in May, but more encouragingly, both core and services inflation slowed. We expect further progress on underlying inflation over the coming months. The recent weakening in the labour market, in addition to the slowdown in the domestic economy, are likely to constrain the pricing power of firms. This could see services inflation declining further and moving closer to levels consistent with the inflation target over the coming year.”