UK inflation rose to 3.1 per cent in the year to August, the Office for National Statistics confirmed, arriving at an uncomfortable moment for the Bank of England ahead of its interest rate decision. The reading, up from 2.9 per cent in July, was driven largely by petrol, diesel and airfares, piling fresh pressure on policymakers already watching energy markets closely because of the Iran war.
Grant Fitzner, chief economist at the ONS, said: ‘Sharp price rises for petrol and diesel pushed inflation up again in August. Higher airfares, particularly for long-haul journeys, also contributed to the increase. Rising crude oil and petrol prices increased the annual cost of raw materials and the price of goods leaving factories respectively.’
Services inflation held at 3.4 per cent, the same rate as the previous month. The Bank of England tracks this measure closely as a gauge of underlying domestic price pressures. Food price inflation remained low at around 1.3 per cent, while core inflation, which strips out volatile items, came in at 2.6 per cent.
UK inflation Bank of England: MPC votes 8-1 to hold at 5%
When the Monetary Policy Committee met on 18 September 2024, it voted by a majority of 8-1 to maintain Bank Rate at 5 per cent, according to the Bank of England’s published minutes. One member preferred to reduce Bank Rate by 0.25 percentage points, to 4.75 per cent. Separately, the Committee voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes by £100 billion over the next 12 months, bringing the total to £558 billion.
Andrew Bailey, the Bank of England’s governor, said cooling inflation pressure means the Bank should be able to cut interest rates gradually over the upcoming months, according to BBC News. That cautiously optimistic framing sits in some tension with the August CPI reading, which showed prices still running well above the Bank’s 2 per cent target.
Inflation has remained above that target for over two years. Some hawkish officials, including chief economist Huw Pill, have remained on edge about the Bank’s mandate to maintain price stability. Several economists have urged policymakers to look beyond an energy price shock caused by the Iran war that could push prices higher still in the coming months.
Economists warn of further price pressure ahead
City AM’s Shadow MPC voted 6-3 in favour of leaving interest rates unchanged at 3.75 per cent, with members citing slowing wage growth and a weak labour market as reasons to hold. Jack Meaning, chief UK economist at Barclays, said he believed inflation would peak higher than previously thought in the coming months. Ruth Gregory of Capital Economics suggested prices could be sliding towards an ‘adverse’ scenario laid out by the Bank over the summer, under which inflation could peak at around 4.5 per cent if the Iran war continued to disrupt critical supply chains through to next year, keeping oil prices at levels not seen for years.
Both Gregory and Meaning nevertheless suggested that monetary policy remained restrictive and that there was little evidence of second-round effects building, the mechanism by which higher wage growth feeds back into sustained price rises.
Richard Carter, head of fixed income at Quilter Cheviot, said the data placed a rate hike in the category of ‘a genuine consideration’. ‘With the Bank of England meeting tomorrow, today’s figures put a rate hike into the category of a genuine consideration, with at least one expected this year,’ Carter said. ‘Markets have begun to price in the potential for further rate hikes into 2027, highlighting that the UK has struggled to tame inflation recently and is not expected to do so soon this time around either.’
On the political front, Chancellor John Healey said the war in the Middle East was ‘impacting on inflation worldwide’, and pointed to steps taken by the government including cutting tax on electricity bills, capping bus fares at £2, and lowering rates for pubs, social clubs and live music venues. Shadow chancellor Andrew Griffith argued that rises in business taxes and employment regulation meant costs were ‘being passed on to consumers in the weekly shop’.
The Bank of England’s decision to hold at 5 per cent and simultaneously press ahead with reducing its gilt holdings by £100 billion signals a committee still treating inflation as unfinished business, even as Bailey’s language points toward cuts to come.
