UK Inflation Hits 5-Month High. Will the Bank of England Hike or Hold?

UK inflation rose to 3.1% in August from 2.9% in July, the highest reading in five months. The Bank of England decides on interest rates one day later.

The same shock is showing up elsewhere. Energy costs tied to the Middle East conflict have lifted inflation across major economies over recent months.

A Fuel Problem Wearing an Inflation Label

Bank of England’s July forecast put August inflation at 2.8%, so the headline reading overshot by 0.3 percentage points.

The ONS said motor fuel made the biggest contribution to the rise. Motor fuel prices rose 23% over the year.

Average petrol prices climbed 9.1p between July and August to 161.3p a litre. That is the highest level since November 2022.

Diesel rose 14.2p to 181.8p a litre. Air fares added to the pressure with a 6.2% monthly increase, led by long-haul routes.

Underlying inflation told a different story. Core inflation, which strips out energy and food, held at 2.6% for a fourth consecutive month. Services inflation stayed at 3.4%.

However, those two readings matter most. Policymakers tend to focus more on underlying price growth.

The labour market is not helping the hawks either. Average weekly earnings, which exclude bonuses, rose 3.5% in the three months to July, the ONS reported Tuesday. That is close to the weakest pace since 2020. 

Vacancies over the three months to August dropped to 702,000. Outside the pandemic years, that is the lowest count since 2014. British hiring, meanwhile, has only just started to turn.

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The ECB Went First. The BOE, Fed, and Japan Follow

The figures arrive a day before the Bank of England announces its own rate decision. Most economists expect the Bank to leave Bank Rate at 3.75% when it votes at midday on Thursday.

Investors see a one-in-three chance of a quarter-point hike this week, according to Reuters. Two increases are fully priced before the end of 2026.

Other central banks have not waited. The European Central Bank raised its deposit rate to 2.50% on September 10, pointing to energy costs.

“The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period,” the ECB Governing Council said.

The Federal Reserve announces its decision on Wednesday, with futures pricing roughly 87% odds of a quarter-point hike. The Bank of Japan follows on Friday. Three major central banks could therefore be tightening inside the same week

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