UK inflation rises to 3.1%
Newsflash: Inflation in the UK has risen, putting households under renewed financial pressure.
The Consumer Prices Index, which measures the cost of goods and services across the economy, has risen to 3.1% in the year to August, up from 2.9% in July.
On a monthly basis, CPI rose by 0.5% in August, driven by “Transport, particularly motor fuels”, the Office for National Statistics says.
More to follow….
Key events
UK gilt yields are falling
Rising inflation adds to the challenges facing John Healey as he prepares his first budget.
But the chancellor could be cheered by a peek at the bond markets today, where UK government borrowing costs are falling!
The yield, or interest rate, on short and long-dated UK debt are both dropping today. Ten-year gilt yields, which hit the highest since 2007 this week, are down 5 basis points (0.05 of a percentage point) at 5.35%.
This might indicate that the markets are a little less concerned about the outlook for UK inflation, as core CPI (which strips out food and energy) was unchanged at 2.6% in August.
Rising inflation will make life even tougher for those who are struggling to pay for essentials such as food and energy.
Edward Ware, head of influencing at the Money Advice Trust, the charity that runs National Debtline, says:
“Rising inflation will be yet another unwelcome worry for households already grappling with higher living costs. For people on tight budgets, even small increases in the cost of everyday essentials can make balancing their finances even harder.
“Every day at National Debtline, our advisers see the impact of the squeeze on household budgets, with almost half (46%) of the people we support not having enough money to cover their essential bills each month and two in five behind on their energy bills.
“With the continued squeeze on living costs and with energy bills set to rise in the coming weeks, it’s clear more support for households will be needed. The Government and Ofgem should press ahead with the energy Debt Relief Scheme for customers with unaffordable energy arrears, helping ensure historic debt does not become a permanent barrier to financial recovery.
“Anyone worried about their finances should seek free debt advice as early as possible. Getting help early can make a real difference and may help prevent financial difficulties from escalating.”
Looking further ahead, the financial markets are pricing in at least four UK interest rate rises by the end of 2027.
That would lift Bank rate to 4.75%.
At one stage on Monday, the markets briefly priced in a rise to 5% (implying five quarter-point increases).
Susannah Streeter, chief investment strategist at Wealth Club, says:
The pressure on the Bank of England to raise rates is mounting, although a hold at 3.75% is still expected tomorrow.
The bigger shift is happening in expectations for the months ahead, with markets now pricing in multiple hikes as the energy shock threatens to keep inflation elevated. That is going to pile on the financial pain for those looking to remortgage or get onto the housing ladder.
With energy costs rising and borrowing costs looking set to surge higher, there looks set to be a fresh squeeze on spending, so consumers are going to become even choosier about where they spend their available cash.
The UK increasingly has a stagflationary flavour, warns analysts at Capital.com, saying:
Inflation is rising because of external energy and input-cost pressures at the same time as the domestic labour market and demand are weakening.
But, they add, a wage-price spiral does not appear to be developing, so the majority of Bank of England policymakers could continue to be patient and resist voting for a rate rise.
Capital.com explains:
So while the Fed and ECB are moving towards tighter policy, the BoE arguably has a stronger domestic case for holding. The crucial distinction is between headline inflation and persistent domestic inflation.
If energy pushes CPI higher but wages, services inflation and employment continue cooling, hiking risks unnecessarily worsening the slowdown. If higher energy costs begin feeding into wages, services and expectations, however, the argument for joining the global tightening cycle becomes considerably stronger.
Bank of England expected to hold interest rates despite rise in inflation
The Bank of England is expected to leave UK interest rates on hold tomorrow, despite inflation rising to 3.1% this morning.
Many economists are predicting this morning that the Bank will vote to maintain Bank Rate at 3.75% at midday on Thursday, when it’s next monetary policy decision is due.
The latest money market pricing shows that a ‘no change’ decision is an 80% probability, with just a 20% chance that the Bank hikes rates to 4%.
The Bank’s remit is to keep inflation at 2% in the medium term, so policymakers won’t want to see CPI over 3%!
But…James Smith, developed markets economist at ING, says there is “very little sign” that the energy shock is broadening out to other parts of the inflation basket, writing:
Take food inflation, which slipped even lower in August to 1.1% year-on-year. Producer price data suggests this could actually go negative in the very near-term. That feels unlikely given the wider energy shock. But then again, fertiliser costs have retreated and so far, the sector is displaying signs of strong competition. In time we expect food inflation to rise as the full effect of the Iran war feeds through, but for now there’s little sign of that happening.
It’s a similar story when we look at goods and services the Office for National Statistics has previously defined as having ‘high’ or ‘very high’ energy intensity. This covers everything from fruit to air fares, to canteens. Even stripping out the distortion from last year’s water and car tax hike, the inflation rate for these energy intensive categories has actually fallen this year, That showed no sign of changing in August.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, predicts the Bank will hold rates this week, but might be forced to increase borrowing costs if inflation rises to 4%.
Pugh says:
“While the MPC can take some comfort from the fact that services inflation stayed at 3.4%, the writing is on the wall for a much bigger move upwards in inflation later this year. The weak labour market data yesterday gives the MPC enough cover to keep interest rates on hold this Thursday but it feels more like “when” rather than “if” the Bank will eventually hike rates now if energy prices remain close to current levels.
“Indeed, looking ahead, inflation will probably rise to around 4% early next year as the supply chain impacts of higher oil prices, elevated agricultural prices and second-round effects start to be reflected in consumer prices. We doubt it will be until 2028 that inflation will get back to the 2% target.”
UK inflation rate higher than Germany and France
The UK has a worse inflation problem than the two largest eurozone economies
The UK’s CPI inflation rate of 3.1% was higher than the first (or “flash”) estimates of inflation for France (2.7%) and Germany (2.9%) in August, the ONS reports.
But the US is suffering even more, with an inflation rate of 3.4% in August.
City consultancy Capital Economics says there is a “striking lack of any strengthening in domestic inflation” in today’s CPI report.
They told clients:
The 6.9% m/m rise in fuel prices that pushed up fuel inflation from 15.3% to 23.0% and added 0.2ppts to CPI inflation was no surprise.
Instead, most striking was the absence of any obvious spillover from higher energy prices to other items. Core inflation stayed at 2.6% (consensus 2.6%, CE 2.5%) and services inflation remained at 3.4% (consensus 3.5%, CE 3.4%).
It’s still too early for any “second-round” inflation effects to show up, but it’s telling that there have been hardly any “first-round” inflation effects. For example, food & drink inflation stayed at 1.3%. And although airfares inflation nudged up from -11.6% to -8.0%, it remains below February’s +4.8%.
Food and drink inflation remained low in August.
The ONS reports that the 12-month inflation rate for food and non-alcoholic beverages was 1.3% in August 2026, unchanged from July. It was last lower than this in September 2021.
Prices of chocolate confectionery rose by less than a year ago, while meat prices fell slightly in August.
Factory gate inflation rises too
Worryingly, the cost of goods produced by UK factories rose at a faster rate in August too.
Producer output prices – or the cost of goods at the ‘factory gate’ – rose by 3.7% in the year to August, up from 3.3% in July.
ONS chief economist Grant Fitzner explains:
“Rising crude oil and petrol prices increased both the annual cost of raw materials and the price of goods leaving factories respectively.”
At 3.1% in August, UK inflation is now the highest since March, when CPI hit 3.3%.
ONS chief economist Grant Fitzner says:
“Sharp price rises for petrol and diesel pushed inflation up again in August. Higher airfares, particularly for long-haul journeys, also contributed to the increase.
Air fares jumped too
Air fares rose by 6.2% between July and August 2026, the inflation report show.
This was mainly due to long-haul routes where fares rose in August 2026, compared with a fall a year ago.
Motor fuel prices surged 23% in August
Motor fuel prices across the UK surged by 23% in the 12 months to August, today’s inflation report shows.
That’s up from 15.5% in the year to July, with petrol prices hitting their highest level since November 2022.
The Office for National Statistics reports that:
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the average price of petrol rose by 9.1p per litre between July and August, to an average price of 161.3p per litre.
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Diesel prices rose by 14.2p per litre in August, to an average of 181.8p per litre
Chart: How UK inflation was pushed up by transport costs
UK inflation rises to 3.1%
Newsflash: Inflation in the UK has risen, putting households under renewed financial pressure.
The Consumer Prices Index, which measures the cost of goods and services across the economy, has risen to 3.1% in the year to August, up from 2.9% in July.
On a monthly basis, CPI rose by 0.5% in August, driven by “Transport, particularly motor fuels”, the Office for National Statistics says.
More to follow….
Sanjay Raja, chief UK economist at Deutsche Bank, has predicted UK inflation will rise in August to just over 3%.
Raja told clients last week:
After broadly matching expectations in July, we see price momentum pushing up again in August. Some goods inflation, food inflation and a chunky rise in energy prices will likely see inflation take another small step higher to round up the summer.
We’ll find out in 10 minutes if he’s right!
Experts at Pantheon Macroeconomics have suggested that so-called “AI-flation” could also be a factor pushing up UK prices.
Rob Wood, their UK economist, said Pantheon believe higher electronics prices, linked to chip shortages amid the AI boom, could add 0.2 percentage points to inflation.
Introduction: It’s UK inflation day
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We’re about to learn whether the UK’s cost of living squeeze tightened last month.
Official linflation data due at 7am BST is expected to show the headline rate of UK inflation rose in August, further above the Bank of England’s 2% target.
Economists forecast the Consumer Prices Index will have risen by around 3.1% last month, up from 2.9% in the 12 months to July.
Higher fuel costs, due to the jump in the oil price since the Iran war began, are expected to have pushed up the cost of living again.
Petrol and diesel prices are now at their highest level since the conflict began, with a visit to the pumps now the most expensive since 2022.
A jump in inflation could put more pressure on UK government borrowing costs, which yesterday hit the highest level since 2007 as the bond market sell-off continued.
Britain isn’t alone here, though – yesterday, the average 10-year bond yield for the Group of Seven largest economies hit its highest level since mid-2008.
The UK also isn’t alone in having an inflation problem. Last week, US inflation was clocked at 3.4%, which is likely to encourage the Federal Reserve to raise interest rates tonight.
The agenda
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7am BST: UK inflation report for August
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9.30am BST: UK housing prices and rents report
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1.30pm BST: US retail sales report
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7pm BST: Federal Reserve interest rates decision
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7.30pm BST: Federal Reserve press conference
