Fears that interest rates will have to “stay higher for longer” were stoked again today as the official rate of inflation unexpectedly stayed stuck at 6.7% and oil prices surged on the latest tragedy in Gaza.
Higher fuel and hotel prices kept the Consumer Prices Index unchanged in September, confounding City forecasts of a further small reduction on its long journey back towards the 2% target.
Although the CPI is expected to fall sharply next month following a big drop in the household energy bill cap there are also growing concerns about the impact of a major regional conflict in the Middle East. Some analysts fear oil could top $100 a barrel with clear implications for fuel prices and other costs.
Vivek Dhar at Commonwealth Bank of Australia said: “A long occupation looms as the scenario that pushes Brent oil futures above $100 because it raises the risk that the Israel Hamas conflict expands and potentially draws in Iran directly.”
Gas prices are an even bigger concern as people spend twice as much on heating their homes as they do on travel.
European natural gas benchmark Dutch TTF’s price soared 41% to an eight-month high of €56 per megawatt-hour.
The price has gone up more than 50% in a month. It is still less than half of the price one year ago but fresh fears of an energy crisis are making traders nervous about inflation.
City markets still believe the Bank of England will keep rates on hold when its Monetary Policy Committee meets next month but the odds of one more hike over the winter are seen as around 50-50. Most forecasters do not expect a cut for another year.
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “Inflation is staying obstinately high in the UK, adding fuel to fears that interest rates will have to stay in an elevated position — a pattern of worry that’s just reared up again in the United States. “An unwelcome combination of worries about a worsening situation in the Middle East and concerns about high interest rates settling in, is unsettling investors.”
But Paul Dales, chief UK economist at Capital Economics, said: “The failure of CPI inflation to fall in September from August’s 6.7 per cent will be a bit of a disappointment to most... but as it is still below the 6.9 per cent rate the Bank of England projected in August, we still think that the Bank won’t raise interest rates again.
“It also still leaves inflation on track to fall below 5.1 per cent by December as the chancellor pledged. The new risk, though, is that events in the Middle East restrain how far inflation falls next year.”
Another downside of the inflation level is that the business rates burden will be higher than previously thought in 2024.
Estimates today suggested businesses will have to find an extra £1.7 billion to £1.9 billion next year as rates bills are set to rise in line with the latest CPI.
