Data published by the Office for National Statistics on Wednesday showed UK inflation accelerating to 3.1% in August, its highest level in 5 months, up from 2.9% in July, a day before the Bank of England is expected to announce that it will leave interest rates unchanged despite mounting price pressures.
Fuel prices drive increase
The Office for National Statistics said fuel prices rose 23% in August from the same month a year earlier, making them the main factor behind the rise in inflation. The reading was in line with the average forecast by economists, who had expected consumer-price inflation to accelerate as energy prices began rising again.
The rise in energy prices coincided with the continuation of the US-Israeli war on Iran, which disrupted shipping through the Strait of Hormuz. The Bank of England had forecast in July that annual inflation would reach 2.8% in August, while sterling edged lower after the data were released.
Inflation forecast to reach 4.5% at the start of 2027
Economic research firm Pantheon Macroeconomics forecast that UK inflation would rise to 4.5% at the start of next year, 2027, if the Iran war continued, amid shortages of oil and liquefied natural gas and rising prices.
Economists at the firm warned that energy costs for UK households could rise by at least 20% on average from January, increasing energy bills by an average of 344 pounds sterling, equivalent to 463 dollars, a year.
The firm's economists said persistently high inflation could force the Bank of England to raise interest rates at the start of next year to contain prices. The UK interest rate remains at 3.75%, close to the US interest rate.
Higher interest rates increase the cost of mortgage and personal loans for millions of Britons, alongside rising costs for vehicle fuel, gas, electricity and food.
For the government, today's figures are a major blow to an administration that has easing the burden of living costs at the top of its priorities
Pressure on the budget and borrowing costs
UK Prime Minister Andy Burnham has said that reducing the cost of living is a priority for his government, but higher inflation means increased public-service costs and mounting pressure on the budget, as well as a higher cost of financing programmes to support UK households and ease the burden of energy costs.
UK Chancellor John Healey is preparing to present a budget to parliament in October, at a time when borrowing costs have risen, increasing spending for the British government, which relies on bonds of varying maturities to finance its debt.
The yield on 10-year UK government bonds rose to 5.42%, while the yield on US Treasury bonds also exceeded 5%, reaching its highest level since 2007.
