British inflation rose to a five-month high of 3.1% in August, driven by higher petrol and diesel prices and more expensive airfares, although underlying inflation remained steady ahead of the Bank of England’s policy meeting.
The headline inflation rate matched economists’ expectations and rose from 3.0% in July, according to the Office for National Statistics (ONS).
ONS chief economist Grant Fitzner said rising fuel prices had pushed inflation higher.
“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,” he said.
Core inflation, which excludes volatile items such as food and fuel, held at 2.6% for a fourth consecutive month. Services inflation, closely watched by the Bank of England for signs of domestic price pressures, also remained unchanged at 3.4%.
The figures come a day before the Bank of England is expected to keep interest rates unchanged. Markets currently see around a 20% chance of a 25-basis-point rate hike on Thursday, while pricing points to a 75% chance of two rate increases before the end of 2026.
The rise in energy prices is expected to put further pressure on inflation in the coming months as domestic energy bills adjust to higher global prices with a lag.
Goldman Sachs expects UK headline inflation to peak at 3.9% in early 2027.
Producer price data also pointed to stronger cost pressures. Factory output prices rose 3.7% year-on-year in August, up from a revised 3.3% in July, while input prices rose 6.1% after July’s figure was revised higher to 5.8%.
Despite the higher headline inflation rate, Charlotte O’Leary, associate economist at the National Institute of Economic and Social Research, said the underlying figures were likely to support the case for the Bank of England to hold rates.
“With limited evidence of second-round effects so far, we expect the MPC to hold rates tomorrow,” she said.
However, she added that persistent inflationary pressures and resilient economic growth could eventually give policymakers room to raise rates.
Reuters
