UK Inflation Rises to Five-Month High of 3.1%

• UK annual inflation accelerated to a five-month high of 3.1% in August 2026, in line with economists’ expectations. The increase was driven mainly by higher energy costs following renewed conflict in the Gulf.
• According to the Office for National Statistics (ONS), sharp increases in petrol and diesel prices pushed inflation higher, while increased airfares, particularly for long-haul journeys, also contributed. Further increases are expected as higher global energy prices feed through to domestic energy bills with a lag.
• Core inflation, which excludes volatile items such as food as well as fuel, held at 2.6% for a fourth consecutive month, while services inflation remained unchanged at 3.4%. This provided some reassurance to the Bank of England (BoE) that broader price pressures have not accelerated to the same extent as headline inflation.
• Producer-price inflation was less encouraging. Manufacturers’ output prices increased 3.7% year-over-year in August, while input prices rose 6.1%, suggesting higher energy and raw-material costs are continuing to feed through the production chain.
• Investors were pricing roughly a 20% chance of a 25-basis-point BoE rate hike on September 17, but a 75% chance of two rate increases before year-end. Goldman Sachs expects headline inflation to peak at 3.9% in early 2027.
• The stability in core and services inflation reduces the immediate pressure on the BoE to tighten policy despite the rise in headline inflation. However, stronger producer-price pressures and the expected pass-through from higher energy costs could keep the case for rate increases later in the year alive.

(Source: Reuters)