The fallout from the war in Iran cranked up the heat on households last month as energy bills rose – how uncomfortable could inflation get from here?
The first thing to remember is that a small amount of price rises is normal. It is the sign of a healthy, functioning economy.
But with food alone costing a third more than it did four years ago, thanks to a spike in inflation early in the war in Ukraine, it can feel a battle to make ends meet.
The good news is inflation since the war in Iran erupted has actually been more muted than economists initially feared.
In part, that’s been because energy prices have not been as aggressive. Also higher energy costs haven’t materialised in items such as food – inflation there, at 1.3%, is at actually at its lowest for close to five years.
Meanwhile wages and benefits have typically been outpacing inflation this year, lessening the squeeze for many – so far.
But existing energy cost pressures may push up the likes of food, and other prices, at a faster pace in coming months as they take many months to pass through supply chains.
In fact, economists expect inflation to take a further step up, to hit around 3.5% later in the year.
That is likely to add to the pressure on new Prime Minister Andy Burnham and his Chancellor John Healey to provide more help in the run-up to the Budget, in addition to what’s already been given.
However, any help will have consequences, either in the form of more taxes or less resources for parts of the public sector.
Some have queried if it would be merited.
While energy bills are likely to take a step up in October, the current forecast suggests they will be the best part of £1,000 less than the peak reached after the Ukraine war began.
Talking of bills, what of mortgages and where does this leave the Bank of England?
Remember, interest rate changes take a while to impact prices. The Bank of England sets rates to influence future inflation.
There is little in these figures to change the Bank’s belief that inflation will come down to its 2% target in the medium-term.
Actually, the fact that the likes of food inflation has remained muted may give the Bank of England hope that price pressures remain fairly contained.
Meanwhile, flat jobs data and moderate wage growth may lead it to think that firms have little opportunity to get away with hiking up prices.
So some analysts think interest rates may not rise this year – but there are still risks they do, especially if inflation accelerates by an unexpected amount.
Price pressures are lingering in other areas such as services, so there is always a danger inflation does rise by more than analysts expect later in the year.
The biggest risk of all is that the conflict in the Middle East drags on, which could threaten further upheaval in energy markets and push inflation higher than anticipated.
It is likely to remain a fraction of the pace seen at the start of the war in Ukraine but would leave Burnham, the Bank of England and most of all households with a fresh set of headaches.
