UK inflation climbs to 3.1% but core and services prices hold steady

British inflation rose to a five-month high of 3.1% in August, official figures showed, though measures that strip out volatile energy prices remained stable — a mix likely to shape the Bank of England's rate decision.

The pickup in the annual headline rate matched economists' expectations and was driven largely by fuel and travel costs. The Office for National Statistics said sharp increases in petrol and diesel prices pushed inflation higher, with long-haul airfares also contributing. Rising crude oil and petrol prices lifted both the annual cost of raw materials and the prices of goods leaving factories.

Further increases are expected in the coming months as domestic energy bills, which track global market prices with a lag, move higher.

The rise adds to pressure on Prime Minister Andy Burnham and finance minister John Healey, who have offered voters cost-of-living support but face limited room in a budget plan due on October 28 because of weak public finances. Healey said the conflict in the Middle East was affecting inflation worldwide, including household bills, weekly shopping and petrol pumps.

Underlying measures steady

Despite the headline rate exceeding the central bank's July forecasts, policymakers are expected to focus on core and services inflation. Core inflation, which excludes volatile items such as food and fuel, held at 2.6% for a fourth consecutive month. Services inflation, watched closely for signals on wage growth and longer-term price pressures, was unchanged at 3.4%.

A day earlier, ONS data showed wage growth remained close to its weakest since 2020. Analysts said the limited evidence of second-round effects pointed to the Bank of England holding rates steady, though mounting inflationary pressures and resilient growth could eventually allow a rate increase without materially damaging the economy.

Market reaction and outlook

Sterling slipped slightly after the figures. Investors see roughly a 20% chance of a quarter-point rate hike on Thursday, and a 75% chance of two hikes before the end of 2026, reflecting concerns that higher energy costs could feed broader price pressures. Goldman Sachs said this week it expected headline inflation to peak at 3.9% in early 2027.

Britain's economy grew by the most among the Group of Seven nations in the first half of 2026, potentially adding to inflation pressure.

Producer price inflation appeared more concerning for longer-term pressures. Output prices rose 3.7% in annual terms in August, above all forecasts, after an upwardly revised 3.3% in July. Input prices rose 6.1%, while July's reading was revised up sharply to 5.8% from 4.9%.