Key Takeaways
- Economists predict a rise in inflation to 3.2% in August as a result of higher motor fuel prices.
- Core inflation, which strips out volatile food and energy prices, is also expected to rise.
- A rise in inflation is not likely to trigger an immediate interest rate rise at the BoE’s Thursday meeting, with financial markets suggesting the Bank will hold.
UK inflation is set to rise above 3% once again as the energy supply shock continues to push up prices.
August’s Consumer Prices Index, which will be released on Wednesday, is expected to have increased by 3.2% over a year earlier, up from 2.9% in July, according to FactSet consensus.
The uptick is likely to be driven by a rise in motor fuel prices and modest increases to food and core goods prices. Core inflation, which strips out volatile food and energy prices, is set to rise just 0.1 percentage point to 2.7%.
“The inflation outlook has turned muddier,” say Deutsche Bank economists Sanjay Raja and Maui Brennan. “A re-escalation of the Middle East conflict has sent energy prices soaring. Pump prices have risen meaningfully as a result.”
When Are the Next UK Inflation Releases?
- Sept. 16
- Oct. 21
- Nov. 18
- Dec. 16
When Will UK Inflation Peak?
Economists expect inflationary pressures to build over the coming months before peaking near the end of the year.
Deutsche Bank’s Raja and Brennan expect inflation to peak at 3.6% in November. “Further upward price pressures are building,” the economists wrote in a note. “Weather-related conditions alone will add to higher food prices alongside higher oil and gas prices, albeit modestly.”
However, much of the trajectory depends on the length and scale of the Iran war. An escalation in recent days has sent oil prices back above USD 100 a barrel. While UK consumers are sheltered from the immediate impact of global energy prices due to the energy price cap, regulator Ofgem has already announced a further 4% increase in October after raising the cap by 13% in July.
The energy supply shock isn’t the only driver of inflation: Deutsche Bank’s economists expect the effects of an ‘El Niño’ weather cycle, heatwaves, and droughts to add around 0.2 percentage points to headline CPI over the next 18 months.
Food inflation is set to rise too. In a recent note, the Food and Drink Federation predicted food price inflation will peak at 6.4% next July. This summer’s heatwaves are expected to cause the worst overall UK harvest on record, according to estimates by UK research group Energy & Climate Intelligence Unit.
Morningstar analyst Verushka Shetty says supermarkets have been importing more products to fill the gaps left by the weak harvest, which could lead to higher retail prices.
Will the BoE Raise Rates on Thursday?
Wednesday’s inflation data will feed into the Bank of England’s decision-making ahead of its interest rates decision on Thursday. Market participants expect rates to stay at 3.75% in September, though a rate hike to 4% is predicted before the end of the year as inflation builds up.
While a rate hike in September remains unlikely, analysts say the risks of such a move are building, particularly after economic growth of 0.4% exceeded expectations in July.
“Further confirmation of economic resilience may, in accompaniment with rising energy prices, tilt rate-setters toward the first rate hike of 2026,” says Raymond James European strategist Jeremy Batstone-Carr. “Although we expect another unchanged decision we accept that the Monetary Policy Committee’s decision is becoming an increasingly close call.”
Alexander Harvey of Oxford Economics says there are no signs of significant second-round inflation effects yet, which is when higher prices trigger demands for higher wages. The Bank of England’s Monetary Policy Committee has stressed this risk in earlier meetings this year.
“The labor market remains loose, with wage growth continuing to slow and hiring weak, while inflation expectations are little changed from prewar levels,” says Harvey, suggesting the Bank of England will keep rates on hold at Thursday’s meeting.
Michael Field, chief European markets strategist at Morningstar, adds that a hold is likely to be welcomed by equity markets.
“Uncertainty remains elevated, with the UK economy heavily exposed to global macroeconomic forces beyond its control. However, forecasts for the coming years point to gradual improvement. For now, that appears sufficient to support equity markets,” he says.
