Rising inflation is clearly back on the boardroom agenda. At our CFO forum in Leeds last week, most delegates said higher costs and inflation were the most pressing issues facing their business right now. The good news is that inflation should peak soon. The bad news is that inflation is sticky and will come down only gradually after that. This assumes OPEC doesn’t hand us a get-out-of-jail-free card.

Why is inflation so much higher in the UK than in the eurozone?

To put these concerns in context, inflation has doubled from just 1.7% in September last year to 3.8% in August. That’s a much bigger rise than in the eurozone and elsewhere. We covered this divergence earlier in September. But, in short, the inflation gap between the UK and other countries is largely driven by tax increases and the way the UK’s energy market is structured.

When the Consumer Price Index (CPI) for September is published next month, it’s likely to show inflation rose to – and will likely peak – at 4%. Two elements are driving this rise.

The first is energy price inflation, which has been negative for the last year following big drops in prices last September. This will turn positive soon as that data drops out of the annual comparison.

The second, and more important, driver is food price inflation. Even though headline inflation is 3.8%, food price inflation is 5.1% and certain foodstuffs are far more than that. The price of beef has risen 25%. Chocolate and coffee are up by 15%. This is unwelcome news if you’re a food manufacturer or retailer. Or, if you like a steak followed by chocolate pudding and an espresso.

Why is food price inflation worrying the MPC?

Food price inflation is important for two reasons. First, it plays an outsized role in how households perceive inflation. If the price of your weekly shop is rising every week, then that’s much more noticeable than your home insurance – which you only pay or sign up for once a year – falling by 7% compared to a year ago. It’s also worth noting that food price inflation is higher in the UK than elsewhere, most likely because retailers are passing through the recent increases in employment costs.

Second, there’s good evidence that households start really paying attention to inflation once it gets above 4% because that’s double the Bank of England’s (BoE) target and this then begins to play into pay negotiations.

What’s next for UK inflation?

In what’ll be some reassurance to business leaders and householders alike, we expect inflation to come down, but only gradually over the next year. That’s for three reasons. First, tax rises will keep inflation elevated until next April. Second, most index-linked prices – like your phone and broadband – will rise next year by this month's rate of inflation, which will probably be around 4%. Third, wage growth without a productivity boom is still too high for inflation to slow quickly.

The risk is that households and businesses start factoring higher inflation into their wage expectations and pricing decisions. Indeed, surveys of where people think inflation will be in two years’ time have risen sharply. That would risk inflation staying higher for longer and is one of the key reasons why the BoE probably won’t cut rates again this year.

There’s one potential get-out-of-jail-free card on the board though. OPEC, the oil production cartel, has recently announced a series of big increases in oil production while oil demand looks sluggish. Bloomberg has suggested oil prices could drop by around $10 per barrel by the end of the year. While this would be too late to prevent inflation peaking at 4% in September, it would eventually be enough to knock about 0.2ppts off inflation, helping it come back to target much more quickly.

However, without a significant decline in energy prices, inflation will fall back only gradually over the next couple of years. It might not be back at the 2% target until 2027. The risk is that consumers and businesses decide 3% inflation is the new normal and start factoring this into their decisions. That would delay any further rate cuts even further into next year.

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