The specter of prolonged high-interest rates looms large as the UK’s official inflation rate unexpectedly remains at 6.7%, fuelled by surging oil prices due to the recent tragedy in Gaza. Despite predictions of a gradual decline, the Consumer Prices Index (CPI) for September remained unchanged, confounding experts who anticipated a slight decrease toward the 2% target. Higher fuel and hotel costs kept the index steady, with fears that a potential escalation in Middle East conflict could push oil prices above $100 per barrel, impacting fuel prices and other expenses.
Vivek Dhar, an analyst at Commonwealth Bank of Australia, expressed concerns that a prolonged conflict in the Middle East could elevate Brent oil futures above $100, especially if the Israel-Hamas conflict expands and draws in Iran directly. Gas prices, a significant worry given that households spend twice as much on heating as on travel, have also surged. European natural gas benchmark Dutch TTF’s price soared by 41% to €56 per megawatt-hour, creating worries about an impending energy crisis and its potential impact on inflation.
While many market experts believe the Bank of England will maintain interest rates during its upcoming Monetary Policy Committee meeting, there is a 50-50 chance of a hike over the winter. However, most forecasts do not anticipate a rate cut for at least another year. Susannah Streeter, head of money and markets at Hargreaves Lansdown, highlighted the concern among investors about persistently high inflation and the potential necessity for elevated interest rates, mirroring similar worries in the United States.
Despite the disappointment of CPI inflation remaining at 6.7% in September, some economists find solace in the fact that it is still below the 6.9% rate projected by the Bank of England in August. Paul Dales, chief UK economist at Capital Economics, believes that this stagnation might not prompt the Bank to raise interest rates again. Nevertheless, the risk lies in the Middle East events, potentially impeding the decline in inflation next year.
Additionally, the current inflation level poses another challenge: higher business rates in 2024. Estimates indicate that businesses might need to allocate an extra £1.7 billion to £1.9 billion next year to accommodate rising rates in line with the CPI.
In summary, the unexpected persistence of high inflation, coupled with escalating tensions in the Middle East, has raised concerns about the UK’s economic stability. The impact of these factors on interest rates, energy prices, and business expenses underscores the challenges faced by both consumers and businesses in the coming months.