Key Takeaways
- UK inflation rose in August, in line with economists’ consensus expectations.
- A rise in motor fuel prices made the largest contribution, the ONS said.
- Inflation is likely to keep rising, economists say, forcing the Bank of England to take action by raising interest rates.
UK inflation rose to 3.1% in August as the effects of the Iran war continue to drive up prices, piling pressure on the Bank of England ahead of its Sept. 17 meeting.
The rise from 2.9% in July was in line with the average of economist estimates compiled by FactSet. Motor fuel prices drove the increase in the Consumer Prices Index, the Office for National Statistics said, with housing and housing services also making an upward contribution.
Core inflation, which strips out volatile energy and food prices, came in slightly below expectations to remain unchanged at 2.6%.
“Events in the Middle East are starting to impact the UK’s economic data significantly now,” says Richard Carter, head of fixed interest research at Quilter Cheviot. “With the situation in the Middle East looking increasingly fraught, the expectation is that inflation will continue to climb higher until the end of the year at a minimum.”
Will UK Inflation Rise Further?
After rising above 3% for the first time since March, inflation is expected to increase further in the coming months as the impact of the Iran war filters through to UK prices.
October’s inflation release will show the impact of a further 4% rise in the energy price cap—a move by the UK regulator Ofgem to shield consumers from the full impact of surging oil and gas prices—after it reset 13% higher in July.
Economists are also watching food inflation following this summer’s droughts, which have led to poor harvests in the UK. This, alongside an El Niño weather cycle likely to impact import prices, is expected to lead to a rise in food prices in 2027.
Food inflation remained unchanged in August, coming in at 1.3%. However, the Food and Drink Federation recently predicted food price inflation will peak at 6.4% next July.
Despite the inflationary pressures on the economy, Schroders global head of economics David Rees says Tuesday’s jobs data shows the situation is not a repeat of 2022, when the energy supply shock from the Russia-Ukraine war caused inflation to surge as high as 11.1%.
“The economy is not running hot, the labor market remains loose and wage growth is slowing. That should limit the extent to which imported price pressures become embedded in domestic wages and prices,” Rees adds.
Will the Bank of England Hike Interest Rates on Thursday?
August’s inflation figures, which come a day before the Bank of England’s September rate decision, are unlikely to result in any immediate changes to interest rates.
Activity on derivatives markets implies at least one hike by the end of the year, though the Monetary Policy Committee is expected to keep interest rates at 3.75% this week.
“The Bank of England has grounds to resist market pricing for interest rate hikes this year,” says Schroders’ Rees. “It can look through a temporary global inflation shock while there is still sufficient slack in the economy to prevent it becoming a domestic one.”
However, Quilter’s Carter says August’s inflation figures are putting pressure on the central bank to act.
“With the BoE meeting tomorrow, today’s figures put a rate hike into the category of a genuine consideration,” he says. “Markets have begun to price in the potential for further rate hikes into 2027, highlighting that the UK has struggled to tame inflation recently and is not expected to do so soon this time around either.”
And Felix Feather, economist at Aberdeen, argues that interest rate hikes are coming.
“Overall, there’s nothing in this report to shift judgement on rates, we see the Bank of England delivering two hikes in November and February,” he says. “But current market pricing probably overestimates the degree of the upcoming monetary policy adjustment.”
