“Higher energy costs remain the primary driver of rising inflation, while domestic price pressures remain relatively well contained. However, if energy prices continue to rise, the Bank of England may find it increasingly difficult to sustain its approach. The MPC will be wary of a prolonged period of above-target inflation feeding into significant wage changes and price-setting behaviour. There is little evidence of that occurring so far, but without a marked improvement in the outlook, the balance of risks could shift towards a rate rise before the end of the year.
“Wholesale gas prices have risen sharply as ongoing disruptions to energy supplies from the Gulf coincide with a period of stronger seasonal demand. Households are already facing a 4% increase in energy bills in October, with the reduction in VAT only partially offsetting the impact of higher wholesale gas prices. If gas prices remain around current levels, household energy bills could rise by a further double-digit amount from January, with an even larger increase possible if wholesale prices climb further.
“Headline inflation rose to 3.1% in August, driven by higher fuel prices. More encouragingly for the Bank of England, underlying inflation remained broadly unchanged, with both services inflation and core inflation holding steady in August. Inflation is expected to reach around 3.5% in the fourth quarter before potentially peaking close to 4% in early 2027.”
