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UK inflation rose to 3.1% in August from 2.9% in July, reaching its highest level in five months as petrol, diesel and airfares became more expensive. The increase matched economists’ forecasts and came one day before the Bank of England’s September policy decision.
The Office for National Statistics said transport made the largest upward contribution to the annual inflation rate. Motor fuel prices rose sharply, with petrol increasing by 9.1 pence per litre between July and August. Diesel prices rose by 14.2 pence per litre over the same period.
Grant Fitzner, chief economist at the ONS, said, “Sharp price rises for petrol and diesel pushed inflation up again in August.” He added that higher long-haul airfares also contributed. Crude oil and fuel costs also raised manufacturers’ raw material and factory-gate prices.
Despite the rise in headline inflation, measures watched closely by the Bank of England stayed stable. Core CPI, which excludes energy, food, alcohol and tobacco, remained at 2.6% for a fourth straight month. Services inflation also held at 3.4%.
Neither measure accelerated in August, even as fuel costs pushed the headline rate above 3%. ONS labour data released on Tuesday also showed regular pay growth at 3.5% in the three months to July, close to its weakest pace since 2020.
The Bank of England will announce its interest-rate decision on September 17. Bank Rate currently stands at 3.75% after the Monetary Policy Committee voted 6-3 in July to keep borrowing costs unchanged. Three members had supported a quarter-point increase to 4%.
Financial markets were pricing in about a 20% chance of a quarter-point increase at the September meeting, according to Reuters. Charlotte O’Leary of the National Institute of Economic and Social Research said, “With limited evidence of second-round effects so far, we expect the MPC to hold rates tomorrow.” The BoE has identified energy prices as a risk to inflation.
At its July meeting, the Bank said energy prices had remained volatile since the Middle East conflict began. It said policy would depend on the scale, duration and wider transmission of the energy shock.
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Price pressures were stronger at the manufacturing level. Producer input prices rose 6.1% in the year to August, up from a revised 5.8% in July. Factory-gate output prices increased 3.7%, compared with a revised 3.3% increase a month earlier.
The rise in inflation also comes as Prime Minister Andy Burnham’s government prepares for an October 28 budget. Chancellor John Healey said the Middle East war was affecting inflation across countries and feeding into household bills, shopping costs and fuel prices. Official government records show Burnham became prime minister on July 20, while Healey took over as chancellor on the same date.
Further increases in household energy bills could push headline inflation higher in the coming months because regulated domestic prices respond to wholesale energy costs with a delay.
Moreover, Goldman Sachs expects UK inflation to peak at 3.9% in early 2027. The BoE’s 2% inflation target remains the benchmark, while policymakers continue to track wages, services prices and business costs for signs of pressure.
