UK Inflation Rises to 5-Month High Amid Energy Costs

UK inflation increased to 3.1% in August from 2.9% in July, marking the highest level in five months. The Bank of England is set to announce its interest rate decision the following day.

The rise follows a surge in energy costs due to Middle East tensions, which has pushed inflation higher across major economies over recent months.

ONS reported that car fuel prices contributed most significantly to the inflation spike, rising 23% annually. Average petrol prices rose by 9.1p between July and August, reaching 161.3p per liter—the highest since November 2022. Diesel prices increased by 14.2p to 181.8p per liter, while airfares rose 6.2% monthly, particularly on long-haul routes.

Core inflation, excluding energy and food, remained steady at 2.6% for four consecutive months, with service sector inflation holding at 3.4%. However, policymakers are primarily focused on core price trends.

The labor market also shows mixed signals. Average weekly earnings excluding bonuses rose 3.5% in the three months to July—the lowest since 2020. Job vacancies fell by 70,200 over the same period, reaching a near-10-year low since 2014, though the UK hiring market is beginning to rebound.

The data was released just one day before the Bank of England's interest rate decision. Most economists expect the central bank to hold rates at 3.75% during its Thursday noon vote. Investors currently price in a one-in-three chance of a 0.25 percentage point rate hike this week, with two hikes fully priced in by year-end.

Other central banks have already acted: The European Central Bank raised deposit rates to 2.50% on September 10 amid energy cost concerns. The Federal Reserve will announce its decision Wednesday, with markets pricing a nearly 87% chance of a 0.25 percentage point hike. The Bank of Japan is set to follow on Friday, potentially seeing three major central banks act in the same week.