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Infrastructure (Economics)

Inflation Surges to 3.8%, Challenging Chancellor Ahead of Autumn Budget

Strategic Insights

— 1 min read

The latest inflation figure has risen to 3.8%, its highest since January 2024, despite being lower than the 11.1% peak in October 2022. The key driver of the increase was a 4.9% rise in groceries and a 3.2% uplift in transport, including a record 30.2% month-on-month hike in airfares. This development has intensified pressure on Chancellor Rachel Reeves ahead of the autumn budget, but may alleviate some stress on over-sold infrastructure funds.

Key Takeaways:

  • The UK's annual rate of inflation has jumped from 3.6% in June to 3.8% in July, driven by a 4.9% rise in groceries and a 3.2% uplift in transport.
  • The cost-of-living increase in July was fueled by a record 30.2% month-on-month hike in airfares.
  • The inflation surge has lifted the pound on currency markets, making the Bank of England less likely to repeat a cut in interest rates in September.
  • Chancellor Rachel Reeves is facing an estimated £40bn budget shortfall and will need to consider government spending, including increases to state pension and benefits, based on the September inflation figure.
  • The increased inflation rate is better news for infrastructure investment companies, as many of their contracts are linked to the retail prices index (RPI) measure, which hit 4.8% in July.
  • RPI is used to calculate subsidies for renewable energy funds, and higher inflation-linked revenues can lift the net asset values (NAVs) of these funds, supporting their share prices.
  • However, higher inflation can also come with higher interest rates, which may push up discount rates and depress NAVs in infrastructure and renewables funds.

Statistics:

  • 3.8%: The latest inflation figure, its highest since January 2024.
  • 4.9%: The rise in groceries in July.
  • 3.2%: The uplift in transport costs, including a record 30.2% month-on-month hike in airfares.
  • 30.2%: The month-on-month increase in airfares in July.
  • 11.1%: The peak inflation rate in October 2022.
  • 4.8%: The retail prices index (RPI) rate in July, an 18-month high.
  • £40bn: The estimated budget shortfall facing Chancellor Rachel Reeves.
  • 4%: The base rate set by the Bank of England this month.

Sources:

  • Office for National Statistics
  • Association of Investment Companies

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