UK inflation remained at 3.8% in August, according to the Office for National Statistics on Wednesday, with food inflation easing modestly to 5.1%, down from 4.9% the previous month.
Zara Nokes, global market analyst at JP Morgan Asset Management, said the inflation picture was “increasingly ugly” and warned that “things may get worse before they get better”.
“Of particular concern is the acceleration we are seeing in food inflation. Household inflation expectations have already been picking up in recent months and there is a real risk that this is worsened by a sharp increase in food prices,” she said.
George Lagarias, chief economist at Forvis Mazars, added that the inflation print is “far from comfortable”.
Restaurants, hotels (up 3.8% compared with a 3.4% rise last month) and motor fuel costs continue to rise “substantially”, he noted. The price of petrol rose 0.3p per litre in August, while diesel prices rose by 0.8p per litre in August.
Although this is still down 4.9% on 12 months ago, it has eaten into the reduction. In July, prices were down 6.7% year-on-year.
Lindsay James, investment strategist at Quilter, added that wage growth running at 4.8% means there is a risk that services inflation continues to “prove stubborn”.
“While pay growth has slowed a touch from earlier in the year, it remains strong enough to fuel inflationary pressures and real pay gains are still only marginal,” she said.
All eyes will now turn to the Bank of England’s (BoE) interest rate decision on Thursday, with experts largely expecting the Monetary Policy Committee to hold steady.
Nokes said a rate cut from the Bank of England this week is “almost certainly off the table”, with another cut this year now “looking increasingly unlikely”.
Her view was echoed by others, including Aberdeen deputy chief economist Luke Bartholomew, who said: “Despite being well ahead of the inflation target, the Bank of England will take some comfort in the fact that inflation came in largely as expected and because underlying inflation pressures look to be very slowly fading.”
He added there is “little doubt” the BoE will keep interest rates on hold, but noted it could scale back the pace of its quantitative tightening policy to £70bn, which could provide support to the gilt market.