UK inflation accelerated to 3.1% in August, moving further above the Bank of England’s target and exposing a widening gap between actual price pressures and the central bank’s assumptions just a day before its latest interest-rate decision.
Consumer prices rose from 2.9% in July, matching economists’ expectations and reaching their highest annual rate since March.
But the more important comparison for monetary policy is with the BoE’s own July projection, which had put August inflation at 2.9%.
That 0.2 percentage-point miss is small in isolation.
Coming alongside oil above $100, rising food prices and already elevated inflation expectations, it makes Thursday’s expected decision to leave Bank Rate at 3.75% more uncomfortable.
Energy has changed the inflation path
Much of August’s acceleration reflects a shock the BoE cannot directly control.
Higher petrol and diesel prices pushed transport costs upwards after renewed Middle East fighting lifted crude prices.
Andrew Goodwin of Oxford Economics told PA before the release that weekly government data pointed to a roughly 7% monthly jump in fuel prices, potentially adding around 0.2 percentage points to CPI.
Other pressures are emerging too. Pantheon Macroeconomics has estimated that higher electronics prices linked to semiconductor shortages and the AI investment boom could add another 0.2 percentage points to inflation.
Deutsche Bank expects CPI to peak at about 3.5% in November as energy and other goods-price pressures continue feeding through.
The BoE acknowledged in July that risks to its inflation forecast were tilted to the upside because persistent energy costs could eventually influence wages and broader price-setting.
The 2.9% miss matters more than the consensus
Financial markets were broadly prepared for Wednesday’s 3.1% reading, so the release itself is unlikely to force an immediate policy shift.
The problem is that the BoE was not.
Its July forecast was produced when policymakers were already debating whether inflation risks justified tighter policy.
The Monetary Policy Committee voted 6-3 to keep Bank Rate at 3.75%, with three members preferring an increase to 4%.
A forecast miss therefore strengthens the hand of officials worried that waiting too long could allow an energy shock to become embedded in wages and services inflation.
Economists still expect the Bank to hold on Thursday, but rising inflation has increased expectations of a quarter-point increase later in the year, potentially as soon as November.
Weak jobs data complicates a rate hike
There is still a strong argument against reacting immediately.
Britain’s labour market is cooling. Payroll employment fell again in August, vacancies dropped and private-sector wage growth slowed to 2.9%, reducing the risk of the kind of wage-price spiral that would make temporary energy inflation persistent.
That leaves the BoE facing an awkward split: headline inflation is running hotter than forecast, but domestic demand and hiring are weakening.
Thursday’s decision is therefore unlikely to be about whether 3.1% alone warrants a hike.
The bigger question is whether the BoE still believes inflation will fall back towards 2% without additional restraint.
The 2.9% forecast miss makes that assumption harder to defend than it was in July.
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