UK inflation rises to 3.1% in August as fuel prices surge

BoE rate decision Thursday under renewed inflation pressure

UK inflation climbed to 3.1% in August from 2.9% in July, the Office for National Statistics said Wednesday, as motor fuel prices rose by almost a quarter amid the Iran war, pushing headline inflation further from the Bank of England’s 2% target.

The ONS attributed the August increase to a 23% jump in motor fuel prices. Average petrol prices rose by 9.1 pence between July and August to 161.3 pence per litre, the highest level since November 2022, while diesel prices climbed by 14.2 pence to 181.8 pence per litre. Air fares rose 6.2% over the month, particularly on long-haul routes, as rising crude oil and fuel prices also pushed up the cost of raw materials and factory-gate goods.

Service-sector inflation, closely watched by Threadneedle Street, held steady at 3.4%. Core inflation, which excludes volatile energy and food items, was unchanged at 2.6%.

The figures arrive in a critical week for UK economic management. The Bank of England is due to announce its interest rate decision on Thursday. Financial markets priced roughly a one-in-five chance of a quarter-point increase from the current 3.75% level; the City expects at least four increases to 4.75% next year. Susannah Streeter, chief investment strategist at Wealth Club, said the pressure on Threadneedle Street to raise rates was mounting, though a hold at 3.75% was still expected Thursday. “It feels like Groundhog Day, with consumers once again feeling the pinch due to geopolitical events far beyond their control,” she said.

Economists noted signs that underlying inflation remained contained amid a cooling UK jobs market, though they warned that Middle East fallout could push the headline rate close to 4%. The Bank of England warned in July that a worst-case scenario involving further escalation in the Middle East could drive UK inflation to a peak of 4.5% by mid-2027.

The pressure on UK monetary policy is mirrored across major Western central banks. Oil prices have climbed above $108 a barrel as fighting across the Middle East intensifies, prompting turbulence in global financial markets. The European Central Bank raised interest rates last week, while financial markets expect the US Federal Reserve to raise borrowing costs on Wednesday for the first time since 2023. Bond markets have sold off sharply, with the yield on US government bonds rising above 5% for the first time since 2023 and long-term UK government borrowing costs reaching their highest levels in decades.

Official figures released Tuesday showed wage growth slowing and unemployment rising, conditions the Bank has previously said could help limit the risk of stubbornly high inflation becoming entrenched.

Chancellor John Healey said Britain and other countries were being hit by the Middle East war driving up inflation. He pointed to early action to ease the burden on households and businesses, including cuts to electricity-bill taxes, a £2 cap on bus fares, and lower rates for pubs, social clubs and live music venues. “Despite this serious global uncertainty, our UK economy is proving resilient, and our determination to deliver and growth in every postcode continues,” Healey said.

Andy Burnham, addressing reporters Wednesday, said he was prepared to take “difficult decisions” to tackle high inflation and would act at next month’s budget on the cost of living. He described the rise in inflation as “a concern” but said the underlying picture was one of “resilience” in the economy.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “For the government, today’s figures are a kick in the teeth for an administration that wants to make easing the cost of living its central mission. The budget is quickly coming into focus and with borrowing costs continuing to climb for the UK, measures are going to be limited and thus growth will remain challenged.”