UK inflation to edge higher if oil prices push up energy costs, experts warn
Experts said that if global oil and gas prices continue to soar then this could drive energy costs higher.
The latest figures from the Office for National Statistics (ONS) showed the rate of UK Consumer Prices Index (CPI) was 3.4% in May – slightly higher than the 3.3% forecast by most economists.
It came in lower than the 3.5% recorded for April – however, the ONS has since said that that figure was incorrect due to an error in how it initially calculated price rises, and it should have been 3.4%.
Inflation remaining elevated was largely due to food prices rising in shops, with items like chocolate, jam and meat spiking last month.
Food and non-alcoholic drink prices rose by 4.4% in the year to May – the highest level in more than a year.
The end of Easter sales on furniture and homeware is also thought to have contributed to prices jumping across the category between and April and May.
On the other hand, air fares, petrol and diesel prices fell between April and May, helping to balance out the overall inflation rate.
Experts have said that inflation is set to remain elevated over the coming months, particularly if global oil prices continue to spike.
Laith Khalaf, head of investment analysis at AJ Bell, said: 'The escalation of conflict in the Middle East has bumped up the oil price, which will put upward pressure on inflation if sustained.'
The price of Brent crude oil has risen to a four-month high in recent days since Israel launched an attack on Iran's nuclear programme and conflict between the two countries has escalated.
It has stoked fears over possible disruption to the supply of crude in the Middle East – with Iran a significant exporter of oil, and the potential for oil and gas passing through the Strait of Hormuz to be obstructed.
Higher energy prices – which have not been factored into the latest ONS data – threaten to push up inflation in the UK.
Rob Wood, chief UK economist for Pantheon Macroeconomics, said he was expecting inflation to 'bounce around these rates for the rest of the year' and to peak at 3.6% in September when energy prices spike.
This peak could rise to as much as 3.8% if oil and natural gas prices continue to soar, he said.
Matt Swannell, chief economic advisor to the EY Item Club, said: 'Headline inflation is likely to edge upwards over the next few months, and the increase could be more pronounced if the recent rise in Brent crude oil prices is sustained.
'But we expect inflation to cool from October, as the positive contribution from the energy category wanes.'
Experts also said that the Bank of England was facing a difficult task in setting interest rates amid price volatility in global markets.
Most economists expect the Bank to keep UK rates the same, at 4.25%, when it makes the next announcement on Thursday.
Mr Wood said policymakers are likely to 'proceed cautiously' with just one more cut to rates this year, expected in November, amid 'sticky' inflation.
Elsewhere, the ONS's data showed the statisticians preferred measure of inflation, Consumer Prices Index including owner occupiers' housing (CPIH), fell to 4% in May from 4.1% in April.
Meanwhile, the Retail Prices Index (RPI) rate of inflation fell to 4.3% from 4.5%.
However, the ONS said April's RPI figure was also 0.1 percentage points too high, and should have been 4.4%.
This happened because of an error that meant the effect of vehicle tax hikes in April was overstated in the data collected for the month.
The ONS said it would not be revising the official published figures, in line with its policy which only carries out revisions in exceptional circumstances.
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