According to official data released by the Office for National Statistics on Wednesday, UK inflation rose for the second consecutive month ahead of the Bank of England‘s interest‑rate decision. Consumer prices were up 3.1% in the year to August, the highest level since March, compared with 2.9% the month before. The increase matches the median forecast from economists.
The acceleration in inflation was driven by higher fuel prices amid the war in Iran and by rising airfare costs during the summer holiday season. The growing price pressure creates political challenges for Prime Minister Andy Burnham, who took office in July with a pledge to improve citizens’ financial situation. Later on Wednesday, Burnham said that next month’s budget “will be difficult” amid rising inflation and borrowing costs.
Domestic inflationary pressure and energy prices
Domestic inflationary pressure remains moderate, but it is expected to intensify in the coming months. According to the ONS, services inflation – a key indicator of internal price pressure – stayed at 3.4% in August. Core inflation, which excludes energy, food, alcohol and tobacco, also held steady at 2.6%. Bank of England officials are expected to leave rates unchanged at this week’s meeting, as a weak labour market is currently helping to contain price pressures linked to the conflict in the Middle East. However, as the war drags on, maintaining this stance is becoming increasingly difficult.
British drivers are facing the highest diesel and petrol prices since 2022, with oil prices exceeding 100 dollars per barrel. Bank of England Governor Andrew Bailey has also warned of new risks, particularly to food prices, due to extreme drought in the UK and the upcoming impact of the El Niño phenomenon. Most of the inflation increase stemmed from transport costs: motor‑fuel prices rose by 6.9% in August, compared with a 0.4% rise a year ago. Airfares rose by 6.2% for the month, versus 2.1% a year earlier.
Annual food inflation remained almost unchanged at 1.1%, while monthly prices rose by 0.3%. Rising prices for furniture, clothing and footwear tempered overall inflation, as they increased less than a year ago. Meanwhile, producer prices for industrial goods rose by 3.7% year‑on‑year. Fuel and raw‑material prices increased by 6.1% due to the higher cost of crude oil.
Yael Selfin, chief economist at KPMG UK, noted: “Rising energy prices are testing the Bank of England’s wait‑and‑see approach. Higher energy costs remain the main driver of inflation, while domestic price pressures remain relatively well contained.”
Source: Bloomberg
