Britain's CPI rose to 3.1% in August, a five-month high, soaring oil prices strengthened expectations of interest rate hikes

The Zhitong Finance App learned that UK inflation has rebounded for the second month in a row. According to data released by the UK Office for National Statistics on Wednesday, the consumer price index (CPI) rose 3.1% in the year ending August, the highest since March, up from 2.9% the previous month. It is in line with economists' median expectations, but higher than the 2.8% previously predicted by the Bank of England.

The acceleration in inflation was mainly driven by rising automobile fuel prices. Affected by Iran's ongoing war, gas station prices in the UK rose markedly. In August, automobile fuel prices rose 6.9% year on year, far higher than the 0.4% increase in the same period last year; air ticket prices, a highly volatile project, also rose 6.2% month-on-month, higher than the 2.1% increase in the same period last year.

Service inflation, a measure of domestic price pressure, remained at 3.4%, and the core inflation rate excluding energy, food, alcohol, and tobacco remained at 2.6%. The food inflation rate was basically flat at 1.1%.

After the data was released, the pound remained essentially flat. Traders cut their bets on the Bank of England's interest rate hike, but they still expect to raise interest rates 4 times over the next 12 months.

The Bank of England will announce its interest rate decision this week, and the market generally expects it to keep interest rates unchanged. However, as energy prices continue to rise, the central bank's previous “wait and see” stance is facing increasing pressure. Bank of England Governor Andrew Bailey also recently warned that new inflation risks are emerging, particularly in terms of food prices. The UK is experiencing extreme droughts, and the potential impact of the El Niño phenomenon could further drive up food costs.

British motorists are currently facing the most expensive gasoline and diesel prices since 2022, while international oil prices have risen to more than $100 per barrel. Higher energy prices are not only directly driving up current inflation, but may also have a further impact through household energy bills.

Bloomberg's economic analysis shows that when the UK energy price cap is reset in January next year, household energy bills could rise by about 25%. If this increase is achieved, the CPI inflation rate may exceed 4% in 2027, further increasing the pressure on the British government to support households.

The Bank of England currently expects inflation to peak at 3.2% in the fourth quarter of this year, and is still significantly above the 2% inflation target. However, the pressure on domestic prices in the UK has yet to completely get out of control. According to the Bank of England survey, household inflation expectations for the next year have fallen from 4% in May to 3.2% in August; another survey of companies shows that the wage increase in 2027 is “roughly the same as 2026 or lower than 2026,” while the average increase in 2026 is 3.6%.

Bloomberg Economics believes that the rise in energy prices may push the UK CPI to slightly above 4% at the beginning of next year, and expects the Bank of England to keep interest rates unchanged at the September meeting, but it will release hawkish signals, opening up space for tightening monetary policy later this year.

At the same time, the British economy showed some resilience even after the war broke out. The UK economy unexpectedly grew by 0.4% in July, but the impact of energy prices, weak labor markets, and the risk of future food price increases still made the Bank of England face a policy trade-off between controlling inflation and avoiding further drag on the economy.