UK Inflation Climbs to 3.1% as Energy Costs Surge

The annual inflation rate increased from 2.9% in July, according to the Office for National Statistics, matching economists’ expectations. Motor fuels were the main driver, with gasoline prices rising 9.1 pence per liter between July and August and diesel increasing by 14.2 pence. Average gasoline prices have now reached their highest level since November 2022.

Energy pressures are extending beyond transportation. Electricity, gas and other household fuel costs rose 6% year-on-year in August after the government-regulated energy price cap was sharply increased earlier this year. As a net energy importer, the U.K. remains particularly exposed to global oil and gas price shocks.

The latest increase comes as crude oil remains above $100 per barrel amid the U.S.-Iran conflict and broader disruption to Middle Eastern energy markets. Higher energy costs add another challenge for British households already affected by several years of elevated living expenses following the pandemic and the energy shock triggered by Russia’s invasion of Ukraine.

Financial markets showed a relatively muted reaction to the inflation report. U.K. government bond yields declined across maturities, with the 30-year gilt yield falling to around 5.91% after reaching a 28-year high a day earlier. The 10-year yield also slipped to about 5.37%, while the British pound was broadly unchanged against both the U.S. dollar and euro.

Attention now turns to the Bank of England, which is due to announce its latest policy decision on Thursday. Markets are pricing in more than an 80% probability that the central bank will leave its key rate unchanged at 3.75%, although expectations for a potential November increase remain. ING economist James Smith said the latest figures provide little evidence of an immediate need for higher rates, particularly because inflation has not clearly spread beyond energy-sensitive areas.

Some underlying indicators remain relatively contained. Food and non-alcoholic beverage inflation eased to 1.1% in August, while inflation across several energy-intensive categories has also declined this year. A soft labor market and muted private-sector wage growth could further limit the ability of businesses to pass higher costs on to consumers.

Still, persistently high fuel prices could weigh on household spending heading into the crucial fourth-quarter retail season. Businesses also face the possibility of higher input costs eventually feeding into prices for food, manufactured goods and services. For policymakers, the key question is whether the current energy-driven increase remains concentrated or develops into a broader and more persistent inflationary shock.