UK inflation accelerated to 3.1% in the year to August, its highest level in six months, as petrol, diesel and airfare prices surged. The pound held flat against the dollar and euro as traders priced in a Bank of England rate hold on Thursday.
UK inflation jumped to 3.1% in the year to August, up from 2.9% in July, as rising petrol, diesel and airfare prices pushed the Office for National Statistics' cost-of-living gauge further above the Bank of England's 2% target. The reading matched economists' forecasts but marked the first print above 3% since March.
Fuel costs drive the increase
Motor fuel prices surged 23% year-on-year, up from 15.5% in the year to July, as the Middle East conflict kept disrupting global oil supplies. Between July and August, average petrol prices rose by 9.1p to 161.3p per litre, their highest since November 2022, while diesel climbed 14.2p to 181.8p per litre. Brent crude has surpassed $100 a barrel in recent days, the BBC reported.
Food and drink inflation, however, held at 1.3% in August, unchanged from July, Capital Economics noted. But the consultancy's chief UK economist, Paul Dales, warned that the pressure has not finished feeding through: "Everyone knows that bigger rises in inflation are on their way." Dales estimates inflation will peak at 4.2% in January.
Pound holds steady as BoE weighs rates
The Bank of England meets Thursday to set interest rates, currently at 3.75%. Markets are pricing in more than an 80% chance the central bank holds steady, with a hike seen more likely at November's meeting. The British pound was flat against both the US dollar and the euro after the data landed.
Gilt yields moved lower regardless: the 30-year yield dipped almost 2 basis points to 5.907%, while the 10-year fell nearly 3 basis points to 5.365%.
UK outpaces its European peers
At 3.1%, UK inflation now sits above France's 2.7% and Germany's 2.9% flash estimates for August, though it remains below the 3.4% rate reported in the US. Chancellor John Healey said the Middle East war is affecting inflation worldwide, not only in the UK.
Sources: BBC News, CNBC, The Guardian
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