U.K. Inflation Rises Ahead of BOE Rate Call — Update

By Don Nico Forbes

U.K. inflation accelerated again in August, keeping price pressures well above the Bank of England's target ahead of a rate decision on Thursday.

Consumer prices rose 3.1% in August compared with a year earlier, up from 2.9% in July, the Office for National Statistics said Wednesday. This was in line with a consensus forecast of economists polled by The Wall Street Journal.

The rise marks the highest inflation reading since March, when energy prices were driven up by the outbreak of war in Iran. It sits just above February's 3%, but remains significantly higher than the BOE's prewar forecasts, which saw inflation falling to its 2% target this year.

Higher household energy costs continued to feed through to inflation in August. Ofgem, the U.K.'s energy regulator, raised the household energy price cap by 13% at the start of July, pushing electricity and gas prices higher and contributing to the sharp rise in headline inflation that month.

"Sharp price rises for petrol and diesel pushed inflation up again," the ONS said, adding that higher air fares and factory prices also contributed to the increase.

Global oil prices have risen even further in recent weeks, with Brent crude moving back above $100 a barrel after tensions in the Middle East intensified. Ofgem also outlined plans to raise the energy price cap again from October.

"U.K. inflation is likely to rise further in the months ahead, as higher energy, manufactured goods and food prices work their way through the economy," said David Rees, head of global economics at Schroders.

The latest inflation reading represents another bump in the road for the Bank of England, which before the outbreak of war in the Middle East was set to cut interest rates. The central bank is expected to leave its benchmark interest rate unchanged at 3.75% at its meeting this week, after holding rates in July by a 6-3 vote.

The BOE has been particularly concerned about persistent domestic inflation pressures, though it is yet to flag evidence of higher energy prices feeding through to other areas of the economy.

Core inflation, which ​strips out ​volatile food and energy ‌prices, remained unchanged at 2.6% in August.

"This is not yet a repeat of the 2022 wage-price shock," Rees said.

The economy has also shown greater resilience than expected this year, with gross domestic product expanding 0.4% in the second quarter while continuing to outpace expectations in July. But economists say this is being driven by rising productivity as opposed to a jump in inflationary domestic demand.

"It doesn't currently look like the prices are being driven by the economy overheating or because of second-round effects. We haven't seen any evidence for that," said Yael Selfin, an economist at KPMG UK.

Therefore, despite the jump in headline inflation, the central bank will be hesitant to react, she added.

A soft labor market could also give policymakers more room to look through a temporary rise in headline inflation. Private-sector pay growth--an important metric for the central bank in gauging the durability of inflation--slowed to 2.8% in the three months through July, from 2.9% in the previous period, according to data released Tuesday.

Still, inflation is now running well above the BOE's 2% target, with investors currently pricing in five almost interest-rate hikes.

"They will probably have an insurance rate hike in November if inflation persists," Selfin said, but added that there is no need to hike yet.

"For now, the energy-price shock is only an external shock. They cannot control it," she said.

Write to Don Nico Forbes at don.forbes@wsj.com

(END) Dow Jones Newswires

September 16, 2026 03:03 ET (07:03 GMT)