British inflation accelerated to a five months high of 3.1% in August, driven by higher fuel prices and airfares, official figures showed on Wednesday.
The rise in the annual headline inflation rate was in line with economists’ expectations, while higher global energy prices are expected to put further pressure on prices in the coming months.
Domestic energy bills could also increase as they adjust to higher global market prices with a time lag.
“Steep increases in petrol and diesel prices drove inflation higher again in August. Rising airfares, especially on long-haul routes, also played a role in the increase,” Grant Fitzner, chief economist at the Office for National Statistics, said.
“Higher crude oil and petrol prices drove up the annual cost of raw materials and the prices of goods leaving factories, respectively.”
The figures add to the challenges facing the government as it seeks to ease the cost of living burden while preparing for its October 28 budget.
Finance Minister John Healey said the impact of the conflict in the Middle East was being felt through higher household bills, grocery costs and fuel prices.
Although headline inflation was above the level projected by the Bank of England in its July forecasts, policymakers are expected to focus closely on underlying measures of price growth.
The ONS said core inflation, which excludes volatile components such as food and energy, remained at 2.6% for a fourth consecutive month in August.
Services inflation, which the BoE closely monitors as an indicator of wage growth and persistent price pressures, also held steady at 3.4%.
“Given the limited evidence of second-round effects so far, we anticipate that the MPC will keep rates unchanged tomorrow,” said Charlotte O’Leary, associate economist at the National Institute of Economic and Social Research.
ONS data published on Tuesday showed that wage growth remained close to its weakest level since 2020, suggesting some easing in domestic inflationary pressures.
However, O’Leary said continued inflationary pressures and resilient economic growth could give policymakers room to raise interest rates without causing major damage to the economy.
Sterling fell slightly after the inflation figures were released as investors assessed the outlook for interest rates.
Markets priced in a roughly 20% chance of a quarter-point rate increase at Thursday’s BoE meeting, while investors saw a 75% chance of two rate increases before the end of 2026.
Goldman Sachs said it expected Britain’s headline inflation rate to peak at 3.9% in early 2027, reflecting concerns that higher energy costs could feed into broader price pressures.
Britain’s economy grew faster than those of the other Group of Seven nations in the first half of 2026, potentially adding to inflationary pressures.
Producer-price data also pointed to rising costs for manufacturers. Output prices increased 3.7% year on year in August, up from a revised 3.3% in July, while input prices rose 6.1%.
Ojo Triumph
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