UK Inflation Rises to 3.1% in August, but Underlying Measures Ease Bank of England Concerns

Britain’s annual inflation rate rose to a five-month high of 3.1 per cent in August, driven largely by higher fuel and airfares, although stable underlying inflation measures could provide some relief for the Bank of England.

Official figures released on Wednesday showed that the headline inflation rate increased from 3.0 per cent in July to 3.1 per cent in August, in line with economists’ expectations in a Reuters poll.

The increase was partly attributed to rising petrol and diesel prices, as well as higher airfares, particularly for long-haul flights.

Grant Fitzner, chief economist at the Office for National Statistics, said the rise in fuel prices had contributed significantly to the latest increase in inflation, while higher crude oil prices also pushed up costs faced by manufacturers.

Despite the rise in headline inflation, measures that the Bank of England closely monitors remained relatively stable. Core inflation, which excludes volatile components such as food and energy, remained at 2.6 per cent for the fourth consecutive month.

Services inflation also held steady at 3.4 per cent. The figure is closely watched by policymakers because services prices are strongly influenced by wages and can provide an indication of longer-term inflationary pressures.

The relatively stable underlying measures could support expectations that the Bank of England’s Monetary Policy Committee will leave interest rates unchanged at its upcoming meeting.

Charlotte O’Leary, an associate economist at the National Institute of Economic and Social Research, said there was limited evidence so far that higher energy costs were creating broader second-round inflationary effects.

However, she noted that persistent inflationary pressures, combined with resilient economic growth, could eventually give policymakers room to consider higher interest rates.

Recent data from the ONS also showed that wage growth remained close to its weakest level since 2020, another factor that could influence the central bank’s decision-making.

The latest inflation figures are also creating challenges for the UK government as it prepares its budget for October 28.

Higher prices continue to put pressure on household finances, while the government faces limited room for additional spending because of the weak state of the public finances.

Finance Minister John Healey said the effects of the conflict in the Middle East were being felt through higher household bills, food costs and fuel prices.

Financial markets are currently pricing in only a limited chance of an immediate interest-rate increase, although expectations of further increases later in 2026 have strengthened amid concerns that higher energy prices could feed into broader inflation.

Goldman Sachs has warned that Britain’s headline inflation rate could rise further, potentially reaching 3.9 per cent in early 2027.

Producer price data also pointed to continuing cost pressures within the manufacturing sector.

Factory output prices increased by 3.7 per cent year-on-year in August, exceeding market expectations and rising from a revised 3.3 per cent in July.

Input prices paid by manufacturers rose by 6.1 per cent in August, while the July figure was revised sharply higher to 5.8 per cent from the previously reported 4.9 per cent.

The latest figures suggest that while Britain’s headline inflation rate is being pushed higher by energy and transport costs, underlying price pressures have so far remained relatively stable, leaving the Bank of England to balance inflation risks against the need to support economic growth.

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