UK inflation rises to 3.1% as motor fuel prices jump by almost a quarter

UK inflation has returned above 3% as soaring fuel and transport prices triggered by the Iran-war" class="entity-link entity-event" data-entity-id="38748" data-entity-type="event">Iran war heap renewed pressure on British households.Figures from the Office for National Statistics show inflation as measured by the consumer prices index rose from 2.9% in July to 3.1% in August. The increase, which matched City forecasts, was driven by motor fuel prices rising by almost a quarter.In a critical week for the economy, the England" class="entity-link entity-organization" data-entity-id="2477" data-entity-type="organization">Bank of England is preparing for a decision on interest rates on Thursday against a backdrop of rising inflationary pressures from soaring oil and gas prices.With headline inflation drifting further from its 2% target, financial markets predict a one-in-five chance of a quarter-point rise from the current level of 3.75% as Threadneedle Street comes under pressure to take action. The City expects at least four increases to 4.75% next year.Andy Burnham said he was prepared to take “difficult decisions” to tackle high inflation and would take action at next month’s budget on the cost of living.He told reporters on Wednesday that while the rise in inflation was “a concern”, the underlying picture was one of “resilience” in the economy.Economists said there were signs that underlying inflation remained in check amid a cooling UK jobs market, although they said the fallout from war in the Middle East could push the headline rate close to 4%.Susannah Streeter, the chief investment strategist at Wealth Club, said: “Given this ramp-up in consumer prices, the pressure on the England" class="entity-link entity-organization" data-entity-id="2477" data-entity-type="organization">Bank of England to raise rates is mounting, although a hold at 3.75% is still expected tomorrow.“It feels like Groundhog Day, with consumers once again feeling the pinch due to geopolitical events far beyond their control.”As fighting across the Middle East intensifies, fuelling turbulence in global financial markets, the oil price has soared to more than $108 a barrel.The sharp rise in energy prices pushed the European Central Bank to raise interest rates last week, while financial markets predict the US Federal Reserve would raise borrowing costs on Wednesday for the first time since 2023.Bond markets have been thrown into a tailspin, with intense selling pressure pushing the yield – in effect the interest rate – on US government bonds above 5% for the first time since 2023 and driving long-term UK government borrowing costs to the highest levels in decades.Threadneedle Street kept borrowing costs unchanged in July as it warned that a worst-case scenario in the Middle East – involving further escalation in the war – could drive UK inflation to a peak of 4.5% by the middle of 2027.According to the latest snapshot, the ONS said inflation was driven in August by a 23% increase in motor fuel prices. The average petrol price rose by 9.1p between July and August to 161.3p a litre, the highest level since November 2022. Diesel prices rose by 14.2p to 181.8p a litre.Air fares also rose sharply, with an increase of 6.2% between July and August, particularly for long-haul routes. Rising crude oil and fuel prices also drove up the cost of raw material and the price of goods leaving factories.skip past newsletter promotionafter newsletter promotionHowever, inflation in the service sector of the economy, which is closely monitored by the Bank, remained unchanged at 3.4%. Core inflation – which excludes volatile items such as energy and food – also held steady at 2.6%.Official figures on Tuesday also showed a slowdown in wage growth and rise in unemployment. The Bank has previously said a cooling jobs market could help limit the risk of stubbornly high inflation becoming entrenched.The chancellor, John Healey, will next month present a tough budget as rising inflation and higher borrowing costs complicate the task of funding Andy Burnham’s policy priorities.Richard Carter, the head of fixed interest research at Quilter Cheviot, said: “For the government, today’s figures are a kick in the teeth for an administration that wants to make easing the cost of living its central mission.“The budget is quickly coming into focus and with borrowing costs continuing to climb for the UK, measures are going to be limited and thus growth will remain challenged.”Healey said Britain and other countries were being hit by the war in the Middle East driving up inflation.“We have taken early action to help families and businesses with breathing space, by cutting tax on electricity bills, capping bus fares at £2 and lowering rates for pubs, social clubs and live music venues,” he said.“Despite this serious global uncertainty, our UK economy is proving resilient, and our determination to deliver and growth in every postcode continues.”