Looming hikes in gas and electricity costs are likely to keep inflation higher for longer next year despite another fall in the cost of living expected in September, economists have warned.
Scottish and Southern Electricity's 8.2 per cent average rise in bills, due next month, is set to trigger similar moves from rival energy companies in the days ahead, keeping up the pressure on inflation.
The Bank of England's Consumer Price Index benchmark is forecast to have fallen to its lowest level since April in September – to 2.6 per cent – as big rises in petrol and clothing prices a year earlier are not repeated this time. But experts said another round of rising energy bills risked "sticky" inflation next year.
Royal Bank of Scotland economist Ross Walker said: "With an underlying strengthening in the recovery, another round of hefty utility price hikes in the pipeline, and a more accommodative Monetary Policy Committee (MPC) remit, the risks remain skewed towards an ongoing overshoot of target in 2014."
The EY ITEM Club underlined the improving prospects for the UK economy, raising its growth forecasts this year to 1.4 per cent from 1.1 per cent for this year. It attributed a bubbling housing market and rising consumer confidence for the upgrade.
The MPC expects that inflation will return to 2 per cent by early 2015, although the unemployment rate is now the prime focus under the Bank's new forward-guidance regime.
The MPC will not consider rate rises until the jobless rate falls to 7 per cent. Figures for the quarter to August due this week are expected to show it unchanged at 7.7 per cent.