UK inflation rises to five-month high before BOE decision

[LONDON] UK inflation climbed for a second month as motor fuel prices jumped, according to official figures a day before the Bank of England announces its interest-rate decision.

Consumer prices rose 3.1 per cent in the year through August, the highest since March and up from 2.9 per cent the previous month, the Office for National Statistics (ONS) said on Wednesday (Sep 16). The increase was in line with the median forecast of economists.

The acceleration was driven by higher prices at the pump due to the ongoing war in Iran, as well as air fares during the summer holidays. Rising cost pressures pose a political threat to Prime Minister Andy Burnham who came to power in July pledging to improve people’s finances.

Burnham said later Wednesday that next month’s budget “is going to be challenging” amid rising inflation and elevated borrowing costs.

Domestic pressures remain subdued but are expected to intensify in the coming months. Services inflation, an indicator of domestic pressures, remained at 3.4 per cent in August, the ONS said. Core inflation, which excludes energy, food, alcohol and tobacco, was also unchanged at 2.6 per cent.

BOE officials meeting this week are expected to keep rates unchanged as a weak labour market has helped contain price pressures from the Middle East conflict so far.

However, that stance is becoming increasingly difficult to maintain as the war drags on. UK drivers now face the most expensive diesel and petrol costs since 2022, while oil prices are above US$100 a barrel. BOE governor Andrew Bailey also warned that new risks are coming into play, particularly for food prices, amid extreme drought in the UK and the looming impact of El Niño.

Most of the rise in inflation came from transport costs, particularly motor fuels which rose 6.9 per cent in August, far more than the 0.4 per cent gain a year ago. Airfares, a highly volatile component, jumped 6.2 per cent on the month compared with a 2.1 per cent rise a year earlier.

Annual food inflation was little changed at 1.1 per cent, with prices climbing just 0.3 per cent on the month. Downward pressures came from furniture and clothing and footwear where prices rose less than a year earlier.

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Factory gate prices for those buying manufactured products also accelerated, climbing 3.7 per cent compared with a year earlier. Refined petroleum products and coke contributed to the pickup to the highest annual rate since May. Fuel and raw material prices jumped 6.1 per cent, a pickup driven by higher crude oil costs. 

“Rising energy prices are testing the Bank of England’s wait-and-see approach” said Yael Selfin, chief economist at KPMG UK. “Higher energy costs remain the primary driver of rising inflation, while domestic price pressures remain relatively well contained.”

A Bloomberg Economics analysis found that household energy bills could jump by about 25 per cent when the UK price cap set by regulators resets in January. 

Such an increase would push CPI inflation above 4 per cent in 2027, piling pressure on the Labour government to deliver fresh support for households at a time when the public finances are already under pressure.

Burnham administration’s therefore faces a difficult first budget in October. With the conflict in the Middle East spreading, the outlook has deteriorated sharply over the past month. Oil and gas prices are now above the adverse scenario the central bank set out at its last meeting in July. 

While the UK economy has been surprisingly resilient since the start of the war, there are few signs that price pressures are spiraling out of control. The BOE’s own survey of households showed inflation expectations for the year-ahead dipped to 3.2 per cent in August, down from 4 per cent in May. A separate BOE poll of businesses found that wage settlements for 2027 will “broadly in line with or lower than 2026,” when they averaged 3.6 per cent.

Burnham said the government “won’t take risks with people’s living standards” at the budget next month. Both the PM and Chancellor of the Exchequer John Healey highlighted the Middle East conflict as a key challenge for households, in comments on Wednesday, with Healey singling out the impact of the war on “our bills, our weekly shop and at the petrol pumps.” BLOOMBERG