Inflation is still stuck at nearly double the Bank of England’s target as Rachel Reeves faces more bad news ahead of the Budget.   

Official figures showed headline CPI held firm at 3.8 per cent annually in August, in line with analysts’ expectations. 

According to experts, the latest figures ‘put the final nail in the coffin’ for any hopes of an interest rate decrease tomorrow. Disturbingly, food inflation has surpassed 5 percent for the first time in a year and a half, though this rise has been counterbalanced by reductions in areas like transportation costs.

In a small silver lining, closely-watched core inflation – excluding energy, food, alcohol and tobacco – did ease slightly. 

The picture emerged amid warnings that Ms Reeves’ Budget problems will be worsened by downgrades to productivity.

There is apprehension that the Office for Budget Responsibility might lower UK productivity forecasts—defined as output per worker—potentially forcing the Chancellor to scramble for an additional £9 billion, if not more.

Food inflation nudged above 5 per cent for the first time in 18 months, offset by falls in areas such as transport costs

Inflation is still stuck at nearly double the Bank of England’s target as Rachel Reeves faces more bad news ahead of the Budget

ONS Chief Economist Grant Fitzner noted: ‘Following last month’s rise, annual inflation remained steady in August as various price changes counterbalanced each other.’

He added: ‘The decrease in airfare costs was the primary downward influence this month, with prices rising less than they did a year ago after a significant uptick in July associated with the summer holidays’ timing. This was countered by increased prices at fuel pumps and hotel accommodations dropping less than they did at this point last year.’

‘Food price inflation climbed for the fifth consecutive month, with small increases seen across a range of vegetables, cheese and fish items.’

Retails have been desperately urging the Chancellor not to hit them with more swingeing tax increases at the Budget.  

However, Treasury Chief Secretary James Murray refuted claims that government measures like the increased national insurance and enhanced workers’ rights have led to higher supermarket prices.

He stated: ‘We acknowledge that global commodity prices are a key factor affecting food costs, which is why our three trade deals are so crucial. These agreements not only boost employment and investment in the UK but also help reduce supermarket prices.’

But shadow chancellor Mel Stride said the situation was ‘deeply worrying for families’. 

‘Labour’s decision to tax jobs and ramp up borrowing is pushing up costs and stoking inflation – making everyday essentials more expensive,’ he said. 

‘With borrowing costs hitting a 27-year high, working people and businesses are bracing for even more tax rises to pay for Labour’s mismanagement.’

Suren Thiru, Economics Director at ICAEW, said the inflation figures for August offered ‘no respite’ for households and businesses.

‘August’s unchanged outturn could be followed by an unnerving upswing this month with skyrocketing business costs and food prices likely to see inflation breach the 4 per cent mark in September, despite a weakening economy,’ he said.

‘Slowing services and core inflation offers a rare silver lining as it suggests that underlying price pressures are becoming less sticky. The squeeze from a cooling jobs market should help keep it on a downward path.

UK inflation has been running higher than in other G7 countries 

Increases in goods prices have been driving the CPI number recently

‘These figures are the final nail in the coffin for hopes of a rate cut tomorrow, and with the vote split among rate setters likely to confirm a hawkish hold, another policy loosening this year looks remote.’

Allan Monks, UK economist at JPMorgan, told the Financial Times that even shaving 0.1 or 0.2 per cent from productivity would leave a hole of between £9billion and £18billion.

‘We don’t know precisely what they [the Office for Budget Responsibility] are going to say on productivity, but we have been given indications there will be a downgrade,’ one official told the paper.

The latest Office for National Statistics (ONS) figures showed productivity fell in the second quarter of this year compared to a year ago.