UK inflation climbed to 3.1% in August, up from 2.9% in July, marking its highest level in five months. The increase, driven by higher petrol, diesel, and airfare prices, matched economists’ forecasts and came just one day before the Bank of England’s (BoE) September policy meeting.
Fuel Prices Drive August Inflation Higher
The Office for National Statistics (ONS) reported that 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, while diesel prices climbed 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 further raised manufacturers’ raw material and factory-gate prices.
Core and Services Inflation Remain Stable
Despite the headline rise, measures closely watched by the Bank of England held steady. Core CPI, which excludes energy, food, alcohol, and tobacco, remained at 2.6% for the fourth consecutive month. Services inflation also stayed at 3.4%.
Neither measure accelerated in August, even as fuel costs pushed the headline rate above 3%. ONS labour data released earlier in the week showed regular pay growth at 3.5% in the three months to July, close to its weakest pace since 2020.
Bank of England Prepares for Rate Decision
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 (MPC) 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 key risk to inflation.
At its July meeting, the Bank noted that energy prices had remained volatile since the Middle East conflict began. It stated that policy would depend on the scale, duration, and wider transmission of the energy shock.
Producer Prices Add Pressure to Outlook
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, feeding into household bills, shopping costs, and fuel prices. Official records show Burnham became prime minister on July 20, with Healey taking 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. 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.
