The UK’s consumer prices index increased from 2.9% in July to 3.1% in August, according to data released by the Office for National Statistics. The increase aligned with market expectations and was primarily attributed to motor fuel costs, which climbed by approximately 23%. Petrol prices reached their highest levels since late 2022, while diesel costs also experienced significant gains over the same period.
The uptick in inflation occurred amid escalating conflict in the Middle East, which has driven crude oil prices above $108 per barrel. Beyond fuel, air fares rose sharply between the two months, particularly for long-haul travel. Raw material costs and factory gate prices also increased due to elevated crude oil and fuel expenses. However, service sector inflation remained stable at 3.4%, and core inflation, which excludes volatile energy and food items, held steady at 2.6%.
The Bank of England faces pressure to address the rising inflationary environment as it prepares for an interest rate decision later in the week. Financial markets currently assign a one-in-five probability to a quarter-point rate increase from the existing 3.75% level, with expectations for further increases reaching 4.75% by next year. The central bank had previously warned that a worst-case Middle East scenario could push inflation toward 4.5% by mid-2027.
Economists noted that underlying inflation appeared contained, supported by a softening in the UK labor market, where wage growth slowed and unemployment rose. The European Central Bank raised rates the prior week in response to similar pressures, while global financial markets anticipated a US Federal Reserve rate increase. Government borrowing costs have climbed to their highest levels in decades, complicating fiscal planning for the administration ahead of a budget announcement next month.
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