UK Inflation Accelerates to 3.1% in August as Core Price Growth Steady
UK Inflation Trends and Economic Impact
By William Schomberg and Andy Bruce
LONDON, Sept 16 (Reuters) - British inflation accelerated to a five-month high of 3.1% in August, but measures excluding surging energy prices held stable, official figures showed on Wednesday, a day before the Bank of England is expected to keep interest rates on hold.
The increase in the annual headline rate was in line with forecasts by economists polled by Reuters, who predicted it would be impacted by the resumption of conflict in the Gulf.
Further increases are likely in the coming months when domestic energy bills — which track global market prices with a lag — go up.
Key Drivers of Inflation in August
"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," Grant Fitzner, chief economist at the Office for National Statistics, said.
"Rising crude oil and petrol prices increased both the annual cost of raw materials and the price of goods leaving factories respectively."
Government Response and Fiscal Constraints
The inflation pickup adds to the headaches of Prime Minister Andy Burnham and finance minister John Healey who have offered voters some support with the cost of living but whose options in a budget plan due on October 28 are limited by the weak state of the public finances.
"The war in the Middle East is impacting on inflation worldwide, not just here at home. In our bills, our weekly shop and at the petrol pumps," Healey said after the release of the inflation figures.
Core and Services Inflation: Implications for the Bank of England
CORE AND SERVICES INFLATION LIKELY TO REASSURE BOE
Despite the headline rate of annual inflation coming in higher than the central bank expected when it made its most recent forecasts in July, policymakers are likely to pay more attention to the underlying measures of price growth.
Core Inflation Remains Stable
The ONS said its measure of core inflation — which excludes volatile items such as food as well as fuel — held at 2.6% for a fourth month in a row in August.
Services Sector Inflation
Inflation in Britain's services sector — something the BoE watches closely as it reflects wage growth and longer-term inflation pressures — was also unchanged at 3.4%.
Monetary Policy Outlook
"With limited evidence of second-round effects so far, we expect the MPC to hold rates tomorrow," Charlotte O'Leary, associate economist at the National Institute of Economic and Social Research, said.
ONS data published on Tuesday showed wage growth remained close to its weakest since 2020.
"However, mounting inflationary pressures, alongside resilient growth data, may eventually grant scope to raise rates without materially damaging the economy," O'Leary added.
Inflation Forecasts and Market Reactions
INFLATION COULD PEAK AT 3.9%, GOLDMAN WARNS
Sterling fell slightly after the inflation figures were published.
Investors see a roughly 20% chance of the BoE hiking rates by a quarter point on Thursday. However, there is a 75% chance that two rate hikes will take place before the end of 2026, reflecting concerns about the risk of the jump in energy costs pushing up prices more broadly.
Goldman Sachs Outlook
Goldman Sachs said this week it expected Britain's headline inflation rate to peak at 3.9% in early 2027.
Economic Growth and Producer Price Pressures
Britain's economy grew by the most among the Group of Seven nations in the first half of 2026, potentially adding to inflation pressure.
Producer price inflation, which measures manufacturers' costs and selling prices, looked more worrisome for the BoE in terms of longer-term inflation pressure.
Output prices rose by 3.7% in annual terms in August, above all forecasts after an upwardly revised 3.3% in July, the ONS said. Input prices rose by 6.1% while July's reading was revised up sharply to 5.8% from 4.9% previously.
(Writing by William Schomberg; editing by Sarah Young, graphic by Pasit Kongkunakornkul; Editing by Andrew Heavens)
