UK inflation rose to 3.1% in the year to August, up from 2.9% in July, as fuel prices and airfares pushed the headline rate further above the Bank of England’s 2% target. The Office for National Statistics published the figure on Tuesday, keeping pressure on policymakers one month before the autumn budget.
Petrol rose 9.1 pence per litre and diesel 14.2 pence between July and August, the ONS said, the largest monthly moves since the Middle East conflict began disrupting oil supply. Air fares added to the increase. Energy bills had already lifted the July reading after Ofgem raised the household price cap 13% on July 1, adding £221 to a typical annual dual-fuel bill, which took it to £1,862 for an average household paying by direct debit.
The Bank of England’s central projection in late July showed CPI peaking around 3.2% in the fourth quarter, with risks tilted to the upside. August’s print puts the economy on that path. Forecasters expect inflation to climb further in coming months as wholesale energy costs from the war feed through to household bills, with Cornwall Insight already projecting a further 4% rise in the energy cap from October that would take bills to their highest since July 2023.
Oil is the story behind the number
Every recent UK inflation surprise traces back to crude. Brent has traded above $100 a barrel since Saudi Arabia’s East-West pipeline, which bypasses the Strait of Hormuz, was damaged in a Houthi attack. Saudi Aramco is working to restore about half the pipeline’s capacity within days, and US officials say operations will restart soon, which knocked crude back to around $102 this week. But diesel prices tell the harder story: US diesel is up roughly 60% since February and hit a record $6 a gallon, and similar moves have passed into European pump prices.
The ONS noted that motor fuels contributed the largest upward push to the August rate. Transport costs are among the most visible prices to households, which is why fuel-driven inflation prints tend to land harder politically than services inflation of the same size. The Labour government has promised to ease cost-of-living pressure in the budget next month, but its room to act has narrowed with every energy-driven rise. Syria’s diesel prices jumped 40% this week, triggering unrest, a reminder of how the same supply shock plays out differently across economies at different starting points.
Comparisons with Europe underline the same cause. UK CPI ran above France’s 2.4% and slightly above Germany’s 2.8% in July, and eurozone officials have made little secret of the driver. The European Central Bank raised rates 25 basis points last week, saying the conflict in the Middle East “continues to generate inflation pressures” that will keep inflation well above target for an extended period. The ECB president specifically pointed to crack spreads and fuel prices, a segment of the market she described as previously obscure and now central to the inflation outlook.
What it means for rates
The Bank of England held its key rate at its September meeting and most economists read the August inflation figure as confirming a hold into November rather than forcing a move. Services inflation, the measure the Bank watches most closely for domestic pressure, has been steadier than goods. Food inflation, at 1.3% in July, sits at its lowest in nearly five years. The squeeze is concentrated in energy and transport, not broad-based.
That distinction matters for the Bank’s next steps. Energy shocks fade if supply recovers; the Saudi pipeline repair, if it holds, would relieve the largest single source of the pressure within weeks. Wage-driven services inflation does not fade on its own. The Bank has signaled it will look through temporary energy spikes rather than repeat the mistake of tightening into a supply shock, a lesson from 2022 that officials have cited repeatedly this year.
Markets have their own read. The Fed raised rates a quarter point on Wednesday, its first hike since 2023, and flagged another. Global bond yields have climbed to levels last seen in 2007, with the 10-year Treasury above 5% and long-term UK yields near 5.85%. Capital Economics researchers wrote that the largest rises in long-term borrowing costs are in countries where “the fiscal outlook is most problematic,” naming the US, UK, France, Italy and Japan, while stopping short of calling it a bond market crisis. They added that there are rational reasons for investors to demand higher returns: geopolitical and inflation uncertainty, questions over monetary policy and unsustainable fiscal positions.
For households, the arithmetic is simple and unwelcome. Higher inflation with flat wages means another real-terms pay cut, and the October energy cap rise lands before winter heating demand. For the government, the August figure is the last major inflation print before the budget, and it argues for caution on any spending commitments that could be read as inflationary. Mortgage holders coming off fixed deals this autumn face rates set against this backdrop rather than the cheaper one they hoped for.
The number everyone watches next is the September print, which will capture the first full month of the higher energy cap and whatever oil does after the pipeline restart. If Aramco restores capacity on schedule and crude holds near $100, the peak the Bank projected for the fourth quarter may arrive on time and pass. If the repair slips or the war escalates again, 3.1% will look like the low point of the autumn.