UK inflation was back above 3% in August as spiking energy prices triggered by the Middle East conflict put British households under more pressure, according to the Office for National Statistics. This is an increase from 2.9% in July, pulling further away from the Bank of England’s 2% inflation target.
The ONS said the biggest contributor to inflation was motor fuel prices, which have increased by 23% over the past year, with the average petrol price moving by 9.1p to 161.3p a litre, while diesel increased by 14.2p to 181.8p per litre.
Air fares have also suffered thanks to higher fuel costs, increasing by 6.2% between July and August.
However, inflation in the service sector remained unchanged at 3.4%.
Rob Morgan, chief investment analyst at Charles Stanley Direct, said: “August’s CPI data affirms the start of an upward trend in the pace of price rises over the course of the second half of the year, likely peaking in October or November.”
This is when the next energy price cap comes in, which Morgan noted will herald a further step up in the cost of energy.
There are also concerns about escalating food prices in the latter part of the year, which could send inflation higher.
“Households could also experience escalating grocery prices by the year end as the exceptionally dry UK summer combined with the global El Niño effect takes its toll on crop yields,” Morgan said.
Food inflation is currently “well behaved” at 1.3% year on year, but Morgan warned this could move “significantly higher” in the coming months.
The inflation spike comes ahead of the Bank of England’s decision on interest rates on Thursday 17 September as markets consider whether the central bank will move to curb inflation. The base rate is currently 3.75%.
With the US Federal Reserve largely expected to hike rates later today, and the European Central Bank having already done so, market experts believe it is not a matter of if the Bank of England will raise interest rates, but when.
Nonetheless, Michael Metcalfe, head of macro strategy at State Street Markets, said that the inflation data for August is close enough to expectations to likely keep the Bank of England on ice this month, holding rates steady.
“However, the residual strength in services pricing and the clear re-acceleration of inflation already seen in online inflation in the first half of September means pressure for higher rates will be irresistible in November,” he said.
Hal Cook, senior investment analyst at Hargreaves Lansdown, does not expect the September vote to be an easy one for the Monetary Policy Committee.
“Rates have been broadly expected to sit at 3.75% until 2027, but higher inflation adds weight to the three MPC members who think rates should be increased.
“Adding economic growth of 0.4% in July, compared to forecasts of 0%, makes the decision to increase rates to 4% before year-end even more likely.”
Morgan agreed that the UK’s central bank “needs to tread an exceptionally narrow and thorny path” as it aims to tame inflation while averting an economic downturn.
Scott Gardner, investment strategy at J.P. Morgan Personal Investing, pointed out that the rebound in inflation over the summer has so far been driven by events outside the UK but there may well be potential second- and third-round effects from higher costs across the economy.
“Food prices have started to eke upwards after fertiliser costs increased earlier this year, but other pressures could emerge if businesses decide to pass their higher costs on, he said.
“AI is also an important but often overlooked factor at play in the inflation picture as demand for metals, semiconductors and other supply-chain goods grows.”