Inflation in the UK remained stuck at 3.8% in August, the highest level in 19 months, reinforcing expectations that the Bank of England will keep interest rates unchanged when it announces its latest decision tomorrow.
The Office for National Statistics (ONS) confirmed on Wednesday that consumer prices rose at the same pace as in July, broadly in line with forecasts from analysts and the Bank itself. While price growth has not accelerated, inflation remains nearly double the central bank’s 2% target and far above levels in the US and eurozone.
The figures will do little to ease pressure on chancellor Rachel Reeves as she prepares her first autumn budget, scheduled for November 26. With debt servicing costs rising and productivity forecasts expected to be downgraded by the Office for Budget Responsibility, Reeves is weighing up tax rises and spending cuts worth as much as £40 billion.
Acknowledging the difficult climate, Reeves said: “Families are finding it tough and for many the economy feels stuck.”
Services inflation, a measure closely watched by policymakers as it reflects domestic price pressures, slipped from 5% in July to 4.7% in August. Core inflation, which strips out volatile food and energy prices, also dipped, to 3.6% from 3.8%.
Grant Fitzner, the ONS’s chief economist, said airfares were the biggest downward contributor, rising by less than last year after a sharp July increase linked to the timing of school holidays. “This was offset by a rise in prices at the pump and the cost of hotel accommodation falling less than this time last year,” he added.
Food inflation, however, continued to climb, with grocery prices up 5.1% year-on-year, the fastest pace in 18 months. Rising costs of cheese, fish and vegetables all pushed household bills higher.
Yael Selfin, chief economist at KPMG UK, said the country had become an “outlier” compared to other advanced economies. “Since April, the rise in inflation has been driven largely by domestic policy choices, including the increase in employers’ National Insurance Contributions. These higher costs have been passed on by businesses to consumers, feeding through into higher headline inflation.”
Eurozone inflation has held at around 2% for much of the year, while US inflation picked up to 2.9% in August.
The Bank of England’s monetary policy committee is expected to leave interest rates at 4% on Thursday, maintaining its cautious stance. City economists believe policymakers will hold rates at this level for the rest of 2025.
Paul Dales, chief UK economist at Capital Economics, said: “We think the upside inflation risks are just too high for the Bank of England to cut interest rates [on Thursday] or, more significantly, at the following meeting in November.”
Other ONS data this week showed unemployment holding at 4.7%, its highest in four years, while wage growth is cooling. The latest earnings figure of 4.7% is likely to set the level for next year’s state pension rise under the triple lock.
The ONS is due to release fresh data on the public finances and retail sales on Friday, which will give further clues to the health of the economy.
The pound edged marginally lower after the inflation release, slipping 0.05% against the dollar to $1.36.
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UK inflation holds at 3.8% in August, piling pressure on chancellor ahead of budget