UK inflation hits five-month high — will BoE raise rates?

The Office for National Statistics reported that consumer price inflation rose to a five-month high in the latest monthly reading, reversing several months of decline. The rise was driven by higher prices for food, petrol and services.

Core inflation, which excludes food and energy, also edged up, indicating price pressures beyond volatile commodities.

Higher inflation has reduced household real incomes after pay growth lagged behind consumer prices. Firms in sectors including hospitality and transport passed some rising input costs to customers, and energy bills contributed to overall price movements. Seasonal effects and the timing of fuel and regulated household service price changes were factors in the monthly increase.

The data arrive ahead of the Bank of England’s next Monetary Policy Committee meeting, where policymakers set the Bank Rate. The central bank has stated it will take incoming data into account when deciding policy.

A Bank of England spokesperson noted that the committee will consider the full set of economic indicators, including the labour market and wage growth, when setting policy.

Following the release, financial markets pushed up the priced probability of an additional rate rise before the next announcement. Mortgage rates and other borrowing costs moved in line with those expectations, and the pound showed modest volatility as traders reassessed the outlook.

The Bank increased interest rates repeatedly over the past two years in response to higher inflation after the pandemic and supply disruptions. While headline inflation has fallen from its peak, it remains above the 2% target and some core measures have proved persistent. Both global factors, such as energy costs, and domestic pressures, such as rents and services prices, have affected inflation.

Investors and economists will watch upcoming releases, including wage data, retail sales and producer prices, and the minutes from the next Monetary Policy Committee meeting for further evidence on whether inflation pressures will ease.