Inflation rate set to rise again as Bank of England decision on interest rates looms

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 (ES Compsite)

(ES Compsite)

The rate of inflation is expected to tick back up after months of slowing, in what could be a pivotal reading as the Bank of England considers whether to hike interest rates to the highest level since 2008 or pause them for the first time in 15 meetings.

The ONS will publish August Consumer Price Index inflation figures on Wednesday, with polls of economists suggesting price rises might be gathering pace again.

A surge in the price of oil, as top exporting countries Russia and Saudi Arabia both announced they would cut production, sent the price of many forms of energy and fuel back up during August. That is expected to bring headline inflation above the 7% mark again, with economists projecting a rate of 7.1%, up from 6.8%. If the projections turn out to be accurate, that would be the first time inflation has risen since February.

However, with the rise being driven by energy prices and reflecting international actions rather than domestic price pressures, it is unlikely to be the Bank of England’s main focus. The Bank’s own projections already account for a rise in inflation in August.

Threadneedle Street will be paying closer attention to core inflation, which strips out energy and food costs, and has been at 30-year highs in recent months. Better news is expected here, with core inflation set to tick down slightly to 6.8%.

The readings will come just a day before the Bank of England’s next interest rates decision, with a pause appearing to be on the table for the first time in six months. Markets still expect a hike, but see a one-in-five chance of holding interest rates at 5.25%.

If the Bank does raise rates to 5.5%, it would be the highest point they have reached since 2008, before the Bank began rapidly slashing rates as the Global Financial Crisis took hold.

On the other hand, a pause would break a run of 14 consecutive interest rate rises.

Investec chief economist Philip Shaw said that if inflation came in significantly below expectations, then the Bank could pause rate rises.

“A big downside surprise could potentially swing the committee towards keeping rates on hold,” Shaw said. “On our own forecasts though, this is unlikely. We are looking for an increase from July’s headline rate of 6.8% to 7.1%, mainly due to energy costs, which coincides with the BoE’s forecast in last month’s MPR.”

Analysts at Clear Treasury said  the figures will “further highlight the predicament the Bank of England finds themselves in, trying to fight higher and stickier inflation whilst simultaneously avoiding the UK economy into a recession”.

The Bank’s Eurozone counterpart, the European Central Bank, raised rates last week, for what traders expect to be the last time before they come down again. In the US, the Federal Reserve will meet just  one day before the Bank of England. A pause is seen as all but certain.

The surging price of oil could continue to have an impact on September inflation figures, as Brent Crude surged to almost $95 a barrel today.