UK inflation picks up after July surge in household energy bills

By Andy Bruce and David Milliken

LONDON, Aug 19 (Reuters) - A jump in household energy bills pushed British inflation to a four-month high in July, matching forecasts, and it looks set to rise further as the war in Iran grinds on with no end in sight.

Annual consumer price inflation rose to 2.9% in July from a 15-month low of 2.6% in June, the Office for National Statistics said on Wednesday, reflecting a 13% rise last month in the maximum tariff British regulators allow energy firms to charge households.

Economists polled by Reuters had widely expected to see a rise in inflation to 2.9%, although the Bank of England predicted a smaller rise to 2.8% in forecasts published at the end of last month and sees inflation peaking at 3.2% later this year.

The data help explain new Prime Minister Andy Burnham's continuation of his predecessor's focus on reducing cost-of-living pressures on British households, although stretched public finances before the government's annual budget in October offer little room for broad assistance.

DATA MAY REASSURE BANK OF ENGLAND

The Bank of England is likely to be reassured by the absence of nasty surprises in Wednesday's data, and figures a day earlier showed a slightly cooler labour market, which may limit the lasting impact of inflation caused by the Iran war.

The central bank was burnt by the scale of price rises in 2022 after Russia's full-scale invasion of Ukraine, which, combined with a tight post-COVID job market, drove British inflation above 11%.

U.S. President Donald Trump said on Tuesday that no talks were taking place with Iran and insisted the Strait of Hormuz was open, contradicting Iran's assertion that the critical waterway remained shut to shipping.

Sterling and British government bond futures showed little immediate reaction to the inflation figures.

"July marks the start of a gradual rise in inflation but is unlikely to spur the Bank of England into action," said Yael Selfin, Chief Economist at KPMG, who expects inflation to reach 3.5%.

"Unlike in 2022, when higher energy prices fed into wider cost increases across the economy, softer labour market conditions are helping to limit the scale of a similar pass-through this time around."

A survey published earlier on Wednesday by human resources data company Brightmine showed the median pay increase awarded by British employers was the smallest since September at 3.2%.

OTHER PRICE MEASURES STEADY OR SOFTEN

Core inflation, which excludes the impact of energy and food prices, came in a little higher than expected at 2.6%, unchanged from June, rather than the 2.5% median Reuters poll prediction.

Services inflation, closely watched by the BoE as a gauge of domestically-generated price pressures, eased as the central bank and economists had expected, to 3.4% in July from 3.6%.

Food and non-alcoholic drink price inflation, which economists had expected to surge after the start of the Iran war, cooled to 1.3% — an almost two-year low and adding to signs that fierce supermarket competition has helped to absorb the shock.

"Iran war inflation continues to impact prices here at home, but Britain's economy is resilient," finance minister John Healey said after the data.

Separate official data showed factory gate inflation slowed to an annual 3.1% in July from 3.5% in June.

Input cost growth for manufacturers eased to 4.9% from 7.4% after the ONS's measure of crude oil prices paid by companies dropped sharply for the second month in a row — although the relief looks set to be temporary, with Brent crude futures up 11% in the last two weeks.

(Graphic by Pasit Kongkunakornkul; Editing by Muvija M and Toby Chopra)