Inflation hit 3.2% in August, up from 2% in July, the highest month-on-month jump since records began.
While the Bank of England insists this is temporary, the pace and breadth of price rises across business are piling pressure on governor Andrew Bailey.
The Bank thinks inflation will peak at 4% later this year — City economists now think 5% more likely. That would be 3 percentage points above the Bank’s 2% target.
Bailey will now have to explain himself to Chancellor Rishi Sunak in a formal letter explaining why inflation is so far above target.
Sarah Coles at Hargreaves Lansdown said: “Inflation has taken a breathtaking leap, surging at its fastest rate in over 20 years. It was given a significant shove by the Eat Out to Help Out scheme discounts a year earlier, which will drop out of the figures next month.
“However, much of this enormous jump is powered by the same alarming imbalance between supply and demand that has seen yawning gaps open on supermarket shelves. It spells trouble for shoppers, savers and the broader economy.”
The rising costs are feeding through to business and the real economy. The Office for National Statistics showed the average UK house price swelled by £19,000, or 8%, to £256,000 in the year to July as the property boom outlasts the pandemic and tapering of the stamp duty holiday.
• Character Group, distributor of Peppa Pig, Fireman Sam and Goo Jit Zu toys, saw shares crash 17% as it warned profits will be as much as 10% lower than expected despite soaring demand: it blamed an “exponential increases” in the cost of importing products from China.
• FTSE 250-listed housebuilder Redrow is paying more for steel, timber and cement, costs CEO Matthew Pratt said the company was working to mitigate.
• AIM-listed model maker Hornby said it is “mindful of the potential supply disruption at the ports” as the Christmas rush comes down the tracks.
• Premium mixer maker Fever-Tree expects transatlantic freight charges and US storage costs to weigh on profitability for the rest of the year.
• Wagamama and Frankie & Benny’s owner The Restaurant Group is having to raise wages to attract chefs, with CEO Andy Hornby saying he expects skills and supply shortages to be “obvious pressures for the next year”.
Kevin Brown at Scottish Friendly said: “Many indicators have been showing for a while that inflation is likely to hit 4%, but we believe it could surpass this and reach over 5% in the near future.”
Ed Monk at Fidelity International said: “With inflation outside the Bank of England’s target range, rate-setters will be under pressure to act. The next few months will be a fine balancing act, with growth stagnant while inflation is taking off.”
Interest rates remain at historic lows of 0.1%, but the Bank’s Monetary Policy Committee (MPC) is likely to keep them there for the time being. The MPC’s next meeting is on September 23.
Capital Economics said: “The leap in CPI inflation from 2.0% in July to a nine-year high of 3.2% in August is the first step in a rise that may take inflation to 4.5% by November.
“But as inflation will fall back almost as sharply next year, we don’t think the MPC will raise interest rates until 2023.”