UK inflation returned above 3% as rising fuel and transport prices caused by the war in Iran renewed pressure on British households.
Data from the Office for National Statistics shows inflation, as measured by the consumer price index, rose from 2.9% in July to 3.1% in August, driven by a rise in motor fuel prices of almost a quarter.
In a crucial week for the economy, the Bank of England is preparing to make an urgent decision on interest rates on Thursday amid rising inflationary pressures from soaring oil and gas prices.
As fighting in the Middle East intensifies, adding to turbulence in global financial markets, the price of oil has soared to more than $108 a barrel, raising the prospect of new pressure on businesses and households.
Bond markets are in a tailspin, with intense selling pressure pushing yields – essentially the interest rate – on US government bonds above 5% for the first time since 2023, and the cost of long-term UK government borrowings reaching their highest levels in decades.
The ONS said the biggest contributor to inflation came from a 23% rise in average motor fuel prices last year. The average price of petrol rose 9.1p between July and August to 161.3p per litre, the highest level since November 2022. Diesel prices rose 14.2 pence to 181.8 pence per litre.
Airfares have also risen sharply, rising 6.2% between July and August, especially on long-haul routes. Rising crude oil and fuel prices have also increased the cost of raw materials and the prices of goods leaving factories.
Threadneedle Street kept borrowing costs unchanged in July, warning that a worst-case scenario in the Middle East involving further escalation of war could see UK inflation peak at 4.5% by mid-2027.
Inflation in the services sector of the economy, which the Bank closely monitors, remained unchanged at 3.4%. Core inflation, which excludes volatile items such as energy and food, also remained stable at 2.6%.
Chancellor John Healey will deliver a tough budget next month as rising inflation and rising borrowing costs make it harder to fund Andy Burnham’s policy priorities.
Richard Carter, head of fixed interest rate research at Quilter Cheviot, said: “For the government, today’s figures are a kick in the teeth for an administration that wants to make reducing the cost of living its top priority.
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“The budget is quickly coming into focus and as UK borrowing costs continue to rise, measures will be limited and thus growth will remain in question.”
Healy said Britain and other countries around the world had been affected by the war in the Middle East, leading to rising inflation.
“We have taken early action to help families and businesses get some respite by cutting tax on energy bills, capping bus fares at £2 and cutting fares for pubs, social clubs and music venues,” he said.
“Despite this significant global uncertainty, our UK economy is proving resilient and our determination to deliver results and growth in every postcode continues.”