The prospect of higher interest rates has moved back into focus after UK inflation climbed to 3.1% ahead of the Bank of England’s latest rate decision.
Consumer Prices Index inflation increased from 2.9% in July to 3.1% in August, according to the Office for National Statistics, with higher transport costs, particularly motor fuels, making the largest upward contribution.
Core CPI remained unchanged at 2.6%, while services inflation was also unchanged at 3.4%.
The latest figures leave inflation more than one percentage point above the Bank of England’s 2% target and come ahead of the Monetary Policy Committee’s decision on Thursday.
RATE HIKE PRESSURE
Bank Rate currently stands at 3.75%, with the MPC voting 6-3 to leave rates unchanged at its July meeting.
The three dissenting members voted for an immediate 0.25 percentage point increase to 4%, with the Bank warning at the time that risks to the inflation outlook were tilted to the upside.
Higher energy prices have become an increasingly important part of that outlook, with the continuing conflict in the Middle East adding to uncertainty over inflation and future borrowing costs.
The National Institute of Economic and Social Research says the latest figures were likely to increase the pressure facing policymakers.
Charlotte O’Leary (main picture), associate economist at NIESR, says: “As inflation rises above 3%, the Bank’s Governor will be forced to write his fifth letter to the Chancellor in the last two years.
“Energy, meanwhile, dominates both the news headlines and headline inflation: motor fuel prices have risen, the Ofgem energy price cap is set to increase by a further 4 per cent in October and is expected to rise again in the winter months, while food price inflation ends its disinflationary course.
“Together, these pressures are tightening the purse strings of UK households and reviving concerns over the cost of living.”
BANK EXPECTED TO HOLD
Despite the renewed inflation pressure, NIESR expects the MPC to keep Bank Rate at 3.75% when it announces its decision.
O’Leary adds: “Internationally, escalating geopolitical tensions have pushed oil above $107 per barrel – its highest level since May, and well above the Bank’s assumption of $77 per barrel on average in 2026, which underpins its forecast that CPI inflation will peak at 3.2 per cent. Nevertheless, with limited evidence of second-round effects so far, we expect the MPC to hold rates tomorrow.
“However, mounting inflationary pressures, alongside resilient growth data, may eventually grant scope to raise rates without materially damaging the economy.”
