UK inflation climbs to 3.1% in August, highest since March

UK inflation accelerated to 3.1% in August, up from 2.9% in July and marking the steepest reading in five months. The Bank of England will announce its latest interest rate decision the following day.

Similar pressures are emerging in other regions. The conflict in the Middle East has pushed up energy costs and boosted inflation across several major economies in recent months.

Inflation Driven by Fuel Costs

The Bank of England had projected August inflation at 2.8% in its July forecast, meaning the actual figure exceeded expectations by 0.3 percentage points.

Motor fuel contributed the most to the increase, according to the ONS. Fuel prices rose 23% on an annual basis.

Petrol prices increased by 9.1p per litre between July and August, reaching 161.3p a litre. That level has not been seen since November 2022.

Diesel climbed 14.2p to 181.8p a litre. Air fares also added upward pressure, rising 6.2% month-on-month, particularly on long-haul routes.

Core inflation, excluding energy and food, remained at 2.6% for the fourth straight month. Services inflation held steady at 3.4%.

Those two measures are closely watched, as policymakers tend to emphasise underlying price pressures.

Labour market data offered little support for hawks. Average weekly earnings excluding bonuses rose 3.5% in the three months to July, the ONS reported Tuesday. That is near the slowest pace since 2020.

Vacancies for the three months to August fell to 702,000, the lowest count outside the pandemic period since 2014. British hiring has only recently begun to recover.

ECB Acted First; BOE, Fed, and BOJ Decisions Ahead

The inflation data arrives one day before the Bank of England's rate announcement. Most economists expect rates to stay at 3.75% when the decision is announced at midday Thursday.

Reuters reports that investors see a one-in-three chance of a quarter-point rate hike this week. Two rate increases are fully priced in by the end of 2026.

Other central banks have already moved. The European Central Bank raised its deposit rate to 2.50% on September 10, citing energy costs.

“The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period,” the ECB Governing Council said.

The Federal Reserve will announce its decision on Wednesday, with futures pricing roughly 87% odds of a quarter-point hike. The Bank of Japan follows on Friday. That means three major central banks could tighten policy within the same week.