Inflation looks set to get worse before it gets better

But rising inflation will continue to eat into real incomes and keep bond yields high, adding to the government’s cost of borrowing.

The biggest contribution to the jump in inflation last month came from transport costs, mainly due to a surge in air fares, which can be volatile at this time of year.

However, there were also large upward contributions from hospitality and food – two sectors that have been hit particularly hard by rising labour costs in the wake of last October’s Budget increases in the National Minimum Wage (NMW) and employers’ National Insurance rates.

The bigger picture is that UK inflation has continued to diverge from the euro area, where inflation has settled at around 2%.

This divergence is being driven by higher levels in government-set prices (such as domestic energy bills and the NMW), the continued pass-through of higher employer taxes and high housing costs as demand outpaces supply.

There are still good reasons to expect inflation to start falling in October and drop back to the 2% target in 2026, which is why the Bank of England’s Monetary Policy Committee narrowly voted to cut rates at its last meeting on 6 August.

In particular, the large increases in food prices will drop out of the annual comparison and the cooling labour market should ease wage pressures. And unlike in the post-Covid period, money growth is relatively subdued.

Nonetheless, the news is that inflation looks set to get even worse before it gets any better.