In a statement addressing the latest inflation figures, Yael Selfin, Chief Economist at KPMG UK, highlighted the growing uncertainty surrounding the UK’s inflation trajectory, driven by escalating geopolitical tensions in the Middle East.
The recent surge in energy prices, with oil prices climbing over 13% since last week, is poised to reverse recent declines in petrol costs, directly impacting consumers at the fuel pumps.
This development, coupled with a 12% rise in gas prices, introduces significant risks to the UK’s economic stability, potentially pushing household energy bills up by approximately 3% this autumn if current price levels persist.
The spike in energy costs stems from heightened instability in the Middle East, which has disrupted global energy markets.
Selfin noted that gas price increases could influence the energy price cap, set by Ofgem in August for the final quarter of 2025.
This potential rise in household energy bills adds further pressure to headline inflation, complicating an already volatile global economic environment.
For UK consumers, this translates to higher costs at a time when many are still grappling with economic uncertainties.
The Bank of England’s Monetary Policy Committee (MPC) faces a challenging landscape as it prepares for its upcoming meeting. Selfin suggested that the MPC is unlikely to deviate from its cautious stance, given the external pressures from energy markets.
However, domestic developments offer some reassurance.
Headline inflation eased to 3.4% in May 2025, with both core and services inflation showing signs of slowing.
These trends indicate that the disinflation process remains on track, despite recent increases in labour costs, which had raised concerns about persistent inflationary pressures.
A key factor mitigating the impact of rising energy prices is the strength of the pound against the dollar.
A robust sterling helps cushion the UK economy from the full brunt of higher global energy costs, as imports become relatively cheaper.
Selfin emphasized that this could provide some relief, particularly if underlying inflation continues to moderate over the coming months.
KPMG UK anticipates that the Bank of England may consider an interest rate cut at its August 2025 meeting, provided domestic inflationary pressures remain contained.
The broader economic context also supports cautious optimism. Recent labour market data indicates a weakening trend, with unemployment rising slightly and wage growth slowing.
This, combined with a slowdown in the domestic economy, is expected to limit firms’ ability to pass on higher costs to consumers, thereby constraining pricing power.
Services inflation, a critical component of the UK’s inflation basket, is projected to decline further, aligning more closely with the Bank of England’s 2% target over the next year.
However, the interplay between global and domestic factors creates a delicate balancing act for policymakers.
The energy price shock, driven by geopolitical events, underscores the vulnerability of the UK economy to external disruptions.
While domestic indicators suggest progress in taming inflation, the risk of imported inflation through higher energy costs remains a concern.
Selfin’s analysis underscores the need for vigilance, as the Bank of England navigates these competing dynamics.
Looking ahead, KPMG UK remains cautiously optimistic about the inflation outlook, provided global energy markets stabilize and domestic disinflation continues.
The anticipated decline in services inflation and the moderating labour market could pave the way for a more accommodative monetary policy stance in the near future.
For now, households and businesses alike will be watching closely as energy prices, geopolitical developments, and the Bank of England’s next moves shape the economic landscape in the months to come.