UK Inflation Surges in August, Though Steady Core CPI Eases Concerns

British inflation accelerated to 3.1% in August, its highest level in five months, rising from 2.9% in July and matching market expectations.

The monthly Consumer Price Index increased by 0.5% after a 0.3% rise in the previous month, with higher energy costs linked to the escalating conflict in the Middle East remaining a key driver of both headline inflation measures.

However, core inflation, which excludes volatile food and energy prices, remained unchanged at 2.6%, offering some reassurance ahead of the Bank of England’s policy decision on Thursday, where policymakers are widely expected to leave interest rates unchanged.

Inflation in the services sector, a key gauge of domestic price pressures and wage growth closely monitored by the BoE, also held steady at 3.4% in August.

Economists remain wary that elevated oil prices could generate broader inflationary pressures over the coming months, eventually feeding through to household budgets and consumer spending. Rising prices also present a challenge for the UK government, which has sought to ease cost-of-living pressures while facing limited fiscal flexibility ahead of the October 28 budget due to strained public finances.

While the Bank of England is expected to keep policy unchanged this month, markets continue to price in a strong possibility of two rate increases before the end of 2026. Policymakers are increasingly concerned that higher energy prices could spill over into the wider economy, with economists projecting inflation to peak around 3.9% in early 2027.