The main reasons behind the spike were higher energy costs and airfares, partly linked to increases in the price of oil. However, the later timing of Easter this year also had an impact. Regardless of that Easter effect, there are growing expectations in the markets that the bank's rate-setting panel may look to raise interest rates again during the summer given that inflation has gone back above its 2 percent target and wage increases are running near decade-high rates.
"Pay has been rising more quickly amid growing skill shortages in the jobs market, particularly in areas such as construction and hospitality," said James Smith, developed markets economist at ING. The major reason why the rate-setting Monetary Policy Committee may refrain from raising the bank's main interest rate by a quarter-point to 1 percent is Brexit uncertainty, which is expected to weigh on output in coming months. Though Britain has been granted an extension to its departure from the European Union until Oct. 31, uncertainty is set to persist, especially for businesses.
"The MPC is rightly reluctant to tweak policy while Brexit hangs over the economy like the Sword of Damocles," said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown. However, the pound has fallen sharply in recent few weeks, and that's set to elevate inflation by raising the cost of imports. On Wednesday, it came under further pressure, trading down 0.3 percent at $1.2670 and near 2019 lows, as hopes faded that Prime Minister Theresa May will get Parliament to back her Brexit deal.
Instead, expectations are growing that May will be forced to quit soon and be replaced by a Brexit proponent such as Boris Johnson, the former foreign secretary, which would likely raise again the specter that the country could crash out of the EU without a deal. That is widely expected to cause a recession as tariffs go up on trade between the U.K. and the EU and other restrictions on business are imposed.