UK inflation could end the year higher than previously forecast, with rising energy prices linked to the conflict involving the US, Israel and Iran pushing inflation close to 3%.
David Miles, a member of the Office for Budget Responsibility (OBR), told the Commons Treasury Committee that the recent surge in oil and gas prices could have a significant effect on inflation if current levels persist. According to Miles, the UK could face a “material, significant” increase in inflation, leading to a noticeable rise in household living costs.
Before the escalation in the Middle East, forecasts suggested inflation would fall closer to the Bank of England’s 2% target during the year. However, higher energy prices now threaten to slow that progress.
Oil prices climbed above $100 (£75) a barrel on Sunday before easing slightly. Brent crude was trading at around $89 on Tuesday afternoon, still well above the level recorded before the latest military action began just under two weeks ago.
Gas prices have risen even more sharply, increasing by more than 50% over the same period. The sustained rise in energy costs is likely to filter through to household bills and business costs, adding to broader inflationary pressure.
The Government has made the cost of living a key priority, with the Chancellor introducing measures intended to reduce energy bills. Even so, economists warn that a prolonged conflict could keep global energy prices high.
The prospect of stronger inflation has also shifted expectations in financial markets. Investors are no longer widely expecting the Bank of England to cut interest rates at its upcoming policy meeting next week.
Talk to us about your finances.
