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UK inflation inches higher on rising fuel bills
Confirmed
In Short: UK inflation has edged higher to 3.1%, driven by a 7% month-on-month rise in fuel costs.
In August, UK inflation rose to 3.1%, marking a slight increase from the previous month's reading of 2.9%. This rise is largely attributed to a 7% month-on-month increase in fuel costs, which pushed the overall inflation rate higher. According to the Office for National Statistics (ONS), the increase in energy prices is a key factor, with petrol and diesel prices rising by 23% compared to the same period last year. This trend is expected to continue, with weekly data suggesting another 3-4% rise in petrol and diesel prices through September, potentially lifting headline inflation to 3.4% in the next month's data.
The Bank of England is closely monitoring whether the energy shock is broadening to other parts of the inflation basket. While the core services metric, which excludes volatile and indexed categories, is tracking slightly higher than the headline services index, the overall impact on other sectors remains limited. Food inflation, for instance, has slipped to 1.1% year-on-year, and while it is expected to rise due to the Iran war, this increase has not yet materialized. The ONS reported that the pace of inflation in food and drink remained at 1.3% in the year to August.
The rise in energy costs is also affecting other markets, such as gold and silver prices. Gold prices are inching upwards as high oil prices continue to fuel inflation concerns, and markets are now pricing a 92% probability that the Federal Reserve will raise interest rates. Silver is trading higher, up 1.93%, and 22-karat gold is also trading at Dh 482.50 per gram. The risks to oil prices remain skewed higher, as stockpiles draw down quickly and demand destruction is the only real lever to bring the market back into balance.
The government's response to rising energy costs includes a VAT cut on household electricity bills from 5% to zero on October 1st, saving a typical household about £45 per year. However, this measure is only partially offsetting the impact of higher gas prices, which have been rising due to the Iran war and disruption to global supplies, including liquefied natural gas. Yael Selfin, chief economist at KPMG, warned that if gas prices remain at current levels, household energy bills could rise by a further double-digit amount from January, with an even larger increase possible if wholesale prices climb further.
The ONS noted that the rise in petrol and diesel prices has pushed UK inflation up to its highest level in five months. The services inflation, which is closely monitored by the Bank of England, remained unchanged at 3.4%, providing some evidence on underlying price pressures in the UK economy. Grant Fitzner, chief economist at the ONS, commented, "Sharp price rises for petrol and diesel pushed inflation up again in August." Despite these increases, the government's VAT cut is expected to provide some relief, but it may not be sufficient to mitigate the full impact of higher energy costs.
What's confirmed
- The Office for National Statistics (ONS) said consumer price index (CPI) inflation in the 12 months to August was 3.1 per cent, higher than last month’s reading of 2.9 per cent.
What's still developing
- It’ll be because energy prices have stayed high for a number of weeks, at which point the Bank’s models are telling them there’s a good chance headline inflation exceeds 4%.
- In time, we expect food inflation to rise as the full effect of the Iran war feeds through, but that doesn't appear to be the case currently.
- Since gold pays no yield, higher borrowing costs tend to weigh on its price.
- Investors are expecting Fed Chair Kevin Warsh to tighten the whip against soaring inflation and actually go on to raise interest rates for the first time since 2023.
- Commenting on inflation, shadow chancellor Andrew Griffith said the government's "jobs tax and employment red tape are being passed on to consumers in the weekly shop and their mad energy policies are pushing up costs and leaving Brits exposed".
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- Chancellor John Healey said the war in the Middle East was “impacting on inflation worldwide”.