Andy Burnham has said “difficult decisions” will need to be taken in next month’s budget after a rise in energy prices triggered by the Iran war drove UK inflation above 3%. In a fresh blow for living standards amid the worsening damage to the global economy from the Middle East conflict, official figures showed soaring fuel prices pushed inflation from 2.9% in July to 3.1% in August. With the government under pressure as the fallout from the war rattles global financial markets, the prime minister signalled the 28 October budget would take into account investor fears over the hit to the public finances.
The former Bank of England chief economist, who advised Burnham before he entered Downing Street, told LBC on Tuesday: “The market now suspects that this is a traditional tax-and-spend socialist government with better TikTok videos.” Burnham rejected that characterisation, saying: “We are not that already … It’s not the case that we aren’t going to take difficult decisions.” In a critical week for the economy, the Bank of England is preparing for a decision on interest rates on Thursday against the backdrop of rising inflationary pressures from soaring oil and gas prices. With headline inflation drifting further from its 2% target, financial markets predict a one-in-five chance of a quarter-point rise from the current level of 3.75% as Threadneedle Street comes under pressure to take action. The City expects at least four increases to 4.75% next year.
Economists said there were signs that underlying inflation remained in check amid a cooling UK jobs market. Inflation in the service sector of the economy, which is closely monitored by the Bank, remained unchanged at 3.4%. Core inflation – which excludes volatile items such as energy and food – also held steady at 2.6%.
Official figures on Tuesday showed a slowdown in wage growth and rise in unemployment. The Bank has previously said a cooling jobs market could help limit the risk of stubbornly high inflation becoming entrenched. However, as the fallout from the Middle East war intensifies, economists said inflation in the UK could continue to climb closer to 4%, heaping pressure on the government and the Bank to take action.
Susannah Streeter, the chief investment strategist at Wealth Club, said: “Given this ramp-up in consumer prices, the pressure on the Bank of England to raise rates is mounting, although a hold at 3.75% is still expected tomorrow. According to the latest inflation snapshot, the Office for National Statistics said the increase in the headline rate in August was driven by a 23% increase in motor fuel prices. The average petrol price rose by 9.1p between July and August to 161.3p a litre, the highest level since November 2022.
Diesel prices rose by 14.2p to 181.8p a litre. Air fares also rose sharply, with an increase of 6.2% between July and August, particularly for long-haul routes. Rising crude oil and fuel prices also drove up the cost of raw material and the price of goods leaving factories.
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