UK inflation climbs to 3.1% on fuel surge, a day before the Bank of England decides

British inflation accelerated to a five-month high in August, climbing to 3.1% from 2.9% in July, as sharp rises in petrol and diesel prices fed through to the headline rate — landing exactly one day before the Bank of England announces its September rate decision.

# UK inflation climbs to 3.1% on fuel surge, a day before the Bank of England decides

**Kicker:** Bank of England **Deck:** August CPI rose to a five-month high of 3.1%, in line with forecasts, as petrol and diesel prices surged. But core inflation held at 2.6% and services at 3.4% — the split the Bank of England must weigh when it sets rates on Thursday.

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British inflation accelerated to a five-month high in August, climbing to 3.1% from 2.9% in July, as sharp rises in petrol and diesel prices fed through to the headline rate — landing exactly one day before the Bank of England announces its September rate decision.

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The increase, reported by the Office for National Statistics on Wednesday, was in line with the median forecast of economists polled by Reuters and a separate Wall Street Journal consensus survey — and marks the highest reading since March, when energy prices were driven up by the outbreak of war in Iran. It also came in above the 2.8% the Bank of England itself had forecast for August in its July projections.

The headline, though, hides a two-speed picture. Transport — particularly motor fuels — made the largest upward contribution to the annual rate, with the ONS saying "sharp price rises for petrol and diesel pushed inflation up again"; higher air fares and factory prices added to the climb. Strip out the energy shock and the picture is calmer: core inflation, which excludes energy, food, alcohol and tobacco, held at 2.6% for a fourth consecutive month, and services inflation — the Bank's closely watched gauge of domestic price pressure — was unchanged at 3.4%, a touch below the 3.5% economists had expected. The CPI goods rate rose to 2.7% from 2.2%.

"The inflation data continues to show few signs of a broader increase in prices that indicates a risk of inflation persisting after the energy price shock fades," said Andrew Wishart, senior UK economist at Berenberg. ING economist James Smith said there was "very little sign that the energy shock is broadening out to other parts of the inflation basket" — and that the Bank is therefore set to remain on hold, even as he expects headline inflation to reach 3.4% next month.

Sterling and gilts hold their breath

Markets took the print largely in stride. Sterling was little changed at $1.3471, near the one-month low it touched last week, and flat at 85.66 pence against the euro. Investors now price roughly a 20% chance of a quarter-point hike to 4% on Thursday, but a hike at the November meeting is fully priced, with more tightening seen in 2027. Goldman Sachs said this week it expects UK headline inflation to peak at 3.9% in early 2027. The 10-year gilt yield, at a 19-year high after closing at 5.4056% on Friday and 5.369% on Monday, dipped about 2 basis points on the print; the FTSE 100 opened 0.39% higher.

Pressure building underneath

The details beneath the surface give the hawks ammunition. ONS producer-price data showed input price inflation rising to 6.1% from 5.8%, and output prices climbing to 3.7% from 3.3%, with refined petroleum products among the largest contributors. Brent crude has moved back above $100 a barrel as Middle East tensions intensified, and the RAC said UK diesel prices are at their highest since July 2022, with petrol at its highest since August 2022. Ofgem raised the household energy price cap by 13% at the start of July and has outlined plans to raise it again from October.

"Events in the Middle East are starting to impact the UK's economic data significantly now," said Richard Carter, head of fixed interest research at Quilter Cheviot. "With the situation in the Middle East looking increasingly fraught, the expectation is that inflation will continue to climb higher until the end of the year at a minimum." David Rees, head of global economics at Schroders, said UK inflation is "likely to rise further in the months ahead, as higher energy, manufactured goods and food prices work their way through the economy."

Countering that, Tuesday's ONS data showed wage growth close to its weakest since 2020 — a sign domestic pressure is ebbing even as the economy grew faster than any other G7 nation in the first half of 2026. "With the labour market on the weak side, inflation not ticking up that much, and underlying inflation where it is, it should keep a rate hike at bay," said Kirstine Kundby-Nielsen, senior FX analyst at Danske Bank — though she warned that a dovish hold could leave sterling room to weaken.

Thursday's vote

The Bank is widely expected to leave its benchmark rate unchanged at 3.75% for a sixth consecutive meeting, after holding by a 6-3 vote in July. The three dissenters — Megan Greene, Catherine Mann and Huw Pill — wanted a hike; Pill has since reiterated his "wait-and-see" opposition to cuts in a speech in Scotland. A snap poll by the British Chambers of Commerce found businesses unanimously expecting a hold. Martin Sartorius, lead economist at the Confederation of British Industry, said the Monetary Policy Committee is "likely to keep interest rates unchanged," but warned it will be "increasingly alert to the risk of these costs feeding through to persistently elevated inflation."

A global hiking week

The decision lands in the middle of a global central-bank week. The Federal Reserve announces its own decision at 2 p.m. ET on Wednesday, with markets pricing a roughly 92% chance of a quarter-point hike — the first since July 2023 — and the Bank of Japan follows on Friday. Before the Middle East conflict upended the outlook, the Bank of England had been expected to begin cutting rates this year; instead, investors now see two hikes fully priced before the end of 2026.