Britain’s annual inflation rate climbed to 3.1% in August, marking the first reading above 3% since March, driven largely by surging motor fuel costs.
The figure came in line with economists’ expectations and follows a 2.9% reading in July, when a government-regulated energy price cap was revised sharply upward.
The Office for National Statistics reported that motor fuel costs surged 23% year-on-year, with average gasoline prices rising 9.1 pence per liter between July and August.
Average diesel prices climbed by 14.2 pence per liter in August, with both fuels now at their highest prices since November 2022, according to the ONS.
The cost of electricity, gas and other household fuels jumped 6% year-on-year in August, adding further pressure to British households already struggling with a prolonged cost-of-living crisis.
Crude oil prices hovering above $100 a barrel have kept pump prices elevated, with British motoring body the RAC noting that both fuels have hit price levels not seen in four years since the Iran war began.
Yields on UK government gilts fell across the curve following Wednesday’s inflation data, with the 30-year gilt yield falling nearly 2 basis points to 5.907% after touching a 28-year high on Tuesday.
The benchmark 10-year gilt yield dropped nearly 3 basis points to 5.365%, while the British pound remained flat against both the US dollar and the euro.
The inflation print arrives one day before the Bank of England’s Monetary Policy Committee announces its latest policy decision, with markets pricing in more than an 80% chance of the central bank holding its key interest rate steady at 3.75%, according to LSEG data.
Markets are anticipating a rate hike at the Bank’s next meeting in November, putting Prime Minister Andy Burnham in a difficult position as he attempts to tackle cost-of-living pressures while balancing the public finances.
James Smith, developed markets economist at ING, said in a note Wednesday that there was “nothing in the latest UK inflation numbers that screams a need to hike interest rates.”
“The question is whether the energy shock is broadening out to other parts of the inflation basket. And there is very little sign that this is happening,” he said.
Smith pointed to food and non-alcoholic beverages inflation, which slipped to 1.1% year-on-year in August, as evidence that price pressures remain contained outside of energy.
Bogdan Toma, a partner at McKinsey and Company, warned that gasoline prices at their highest level in nearly four years could signal “an uncertain ‘golden quarter’ for consumers and retailers.”
“With households absorbing back-to-school costs and facing the possibility of higher interest rates, demand heading into the fourth quarter may remain subdued,” he said.
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the inflation increase was “unlikely to convince the Bank of England to hike interest rates just yet,” but could raise fresh concerns among policymakers.
“The U.S.-Iran conflict began over six months ago but higher energy costs are still filtering through to business input prices and household spending,” Gardner added.
Gardner also highlighted that his team is watching closely for second and third round effects, noting that “food prices have started to eke upwards after fertilizer costs increased earlier this year.”
“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,” he said, adding that much still depends on the duration of the war in the Middle East.
