What rising inflation means for mortgages and Budget

Inflation is up again - prices are 3.6 per cent higher than a year ago, worse than the forecast 3.4 per cent - while the economy shrank by 0.1 per cent in May.

- SEAN O'GRADY

This news isn’t helping the government build a reputation for economic competence, and it adds to a rather depressing backdrop to the next Budget in late October, widely expected to be another with substantial tax rises. As we all know, elections tend to be won or lost on the economy.

Why is inflation up?

Partly for technical reasons related to how the consumer price index works: fuel and energy prices fell substantially around this time last year, pushing inflation down to the 2 per cent official target; and while they’re not rising much now, there is that arithmetic effect.

More substantially, and worryingly for ministers and the Bank of England, the figures suggest that core (or underlying) inflation - much of it attached to growth in wages - remains too strong for the Bank to be confident about trend inflation coming down markedly. That means an even slower downward path for interest rates.