Interest rate warning as inflation soars to highest rate in nearly three years

Inflation has jumped to its highest level in nearly three years amid rising food and fuel costs, raising the spectre of higher interest rates.

The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation rose to an annual rate of 2.5 per cent from a figure of 2.1 per cent the previous month, moving further away from the Bank of England’s 2 per cent target.

The official figure again overshot the expectations of analysts, who had predicted that CPI would rise to 2.2 per cent.

The reading comes amid global concerns over the potential for soaring inflation, with the US posting its own 5.4 per cent inflation rate for June earlier this week.

Inflation has jumped to its highest level in nearly three years amid rising food and petrol costs. Picture: Rui Vieira/PA

The Bank of England has already warned that inflation could hit 3 per cent by the end of the year.

Jonathan Athow, ONS deputy national statistician for economic statistics, said: “Inflation rose for the fourth consecutive month to its highest rate for almost three years.

“The rise was widespread – for example, coming from price increases for food and for second-hand cars where there are reports of increased demand.

“Some of the increase is from temporary effects – for example, rising fuel prices, which continue to increase inflation, but much of this is due to prices recovering from lows earlier in the pandemic.

“An increase in prices for clothing and footwear, compared with the normal seasonal pattern of summer sales, also added to the upward pressure this month.”

The ONS said that food and non-alcoholic drinks contributed to the lift in inflation, after a 0.2 per cent price rise for the month compared with significant deflation for the same period last year.

Within food, the largest shift was caused by bread and cereal prices, where prices of items such as packs of individual cakes and crumpets rose this year but fell a year ago.

Meanwhile, the price of petrol increased by 2.5p between May and June, rising to its highest price since October 2018.

A rise in second-hand car prices also contributed to inflation, with reports that prices were buoyed by higher demand at the end of the latest lockdown.

Sarah Coles, personal finance analyst at financial services group Hargreaves Lansdown, said: “Inflation has raced ahead of forecasts again, as we fill our homes and driveways with the things we need to adapt to major lifestyle changes. Higher inflation is the last thing that savers need.

“Inflation prediction is always a thorny business, and there are some indications that we could be seeing the beginning of an inflationary cycle.”

Ulas Akincilar, head of trading at the online trading provider Infinox, said: “A sustained overshoot of the [Bank of England’s] 2 per cent target will steadily increase pressure on its rate-setting committee to raise interest rates to keep inflation in check.

“An interest rate rise is not yet around the corner, but it is steadily becoming a less distant prospect.”

The retail price index (RPI), a separate measure of inflation, increased to 3.9 per cent – the highest since January 2018.

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