The Bank of England has raised interest rates, warning that inflation could jump to almost 5% by the middle of next year. The move comes amid the energy shock caused by the global fallout from the Middle East war involving the US and Israel against Iran.
Before the conflict began in late February, all signs pointed to UK inflation falling to the 2% target. Now, the Bank says the energy shock could push inflation to almost 5% by mid-2026, meaning living costs for millions of households could rise again.
Energy costs and the price cap
Bank of England Governor Andrew Bailey has warned that energy costs are the biggest driver of inflation. In an "adverse scenario," inflation could rocket to 6.2%, the Bank said, based on oil prices shooting back up from below $100 a barrel to $130. Oil has already been at almost $120 during the war.
Ofgem's price cap looks set to jump in January, with its window for factoring in wholesale costs closing in two weeks. As it stands, the cap will surge from an average of £1,723 a year to more than £2,100, and experts are warning of another rise in April.
Budget measures and food inflation
Chancellor John Healey's Budget measures to help with energy costs will take some of the sting out of the leap for those who qualify, but millions of people are fearful of putting the heating on regardless.
Food inflation could jump to 4.75% next year, says the Bank, although intense supermarket competition means experts have been proved wrong on that front before.
Economic outlook and Trump's role
The UK economy has defied doom mongers this year and is growing faster than most competitors. Unemployment hasn't shot up as economists warned, with the jobless rate actually falling at the last count. The Bank doesn't expect the unemployment rate to rise much next year, even in its "adverse" scenario.
Forecasts are just numbers on a page, and what really matters are real world events. For those, most roads lead back to President Trump again. He's seen as a lame duck after the Republicans were humiliated by the Democrats in this week's mid-term elections, but he's still the President and set to reside in the White House for another two years.
A miraculous resolution to the Middle East conflict and the Ukraine war could see inflation start to come down and reduce the threat of more rate hikes. Anything else and more hikes look inevitable, with the next possibly coming before Christmas.
