UK August CPI rises to 3.1%, hitting a 5-month high, as surging oil prices reinforce rate hike expectations

According to Golden Ten Data APP, UK inflation has risen for the second consecutive month. Data released by the Office for National Statistics on Wednesday showed that, in the year to August, the Consumer Price Index (CPI) rose by 3.1%, the highest since March, up from 2.9% the previous month. This figure matches the median economist forecast, but is higher than the Bank of England's previous prediction of 2.8%.

The acceleration in inflation was mainly driven by rising automotive fuel prices. Due to the ongoing war in Iran, UK petrol station prices have risen noticeably, with automotive fuel prices up 6.9% year-on-year in August, far exceeding the 0.4% increase in the same period last year. Airfare, another volatile category, also rose by 6.2% month-on-month, higher than the 2.1% increase a year earlier.

Service sector inflation, an indicator of domestic price pressures, held steady at 3.4%. The core inflation rate, which excludes energy, food, alcohol, and tobacco, also remained at 2.6%. Food inflation was largely unchanged at 1.1%.

After the data was released, the pound remained largely flat. Traders have reduced their bets on Bank of England rate hikes, but still expect four rate increases over the next 12 months.

The Bank of England will announce its interest rate decision this week, and the market widely expects it to keep rates unchanged. However, as energy prices continue to rise, the bank's previous “wait-and-see” stance is under increasing pressure. Bank of England Governor Andrew Bailey has recently warned that new inflation risks are emerging, particularly in food prices. The UK is experiencing extreme drought, and the potential impact of El Niño could further drive up food costs.

UK motorists are facing the most expensive petrol and diesel prices since 2022, and international oil prices have risen above $100 per barrel. The increase in energy prices not only directly pushes up current inflation but may also have further effects via household energy bills.

Bloomberg Economics analysis shows that when the UK energy price cap is reset in January next year, household energy bills could rise by about 25%. If this increase occurs, CPI inflation could exceed 4% in 2027, putting further pressure on the UK government to support households.

The Bank of England currently expects inflation to peak at 3.2% in the fourth quarter of this year, still well above the 2% target. However, domestic price pressures in the UK have not yet spiraled out of control. Bank of England surveys show that household inflation expectations for the next year have fallen to 3.2% in August from 4% in May. Another survey of businesses indicates that companies expect wage growth in 2027 to be “roughly the same as or lower than in 2026,” when the average increase was 3.6%.

Bloomberg Economics believes that rising energy prices may push UK CPI slightly above 4% at the start of next year, and expects the Bank of England to keep rates unchanged at its September meeting but deliver a hawkish signal, paving the way for monetary tightening later this year.

Meanwhile, the UK economy continues to show some resilience following the outbreak of war. The UK economy unexpectedly grew by 0.4% in July, but the shock from energy prices, a weakening labor market, and the risk of future food price increases still leave the Bank of England facing a policy trade-off between controlling inflation and avoiding further drag on the economy.