UK inflation rises to 3.1%
Newsflash: Inflation in the UK has risen, putting households under renewed financial pressure.
The Consumer Prices Index, which measures the cost of goods and services across the economy, has risen to 3.1% in the year to August, up from 2.9% in July.
On a monthly basis, CPI rose by 0.5% in August, driven by “Transport, particularly motor fuels”, the Office for National Statistics says.
More to follow….
Britian’s largest housebuilder has cut its construction plans for this year, in a blow to the government’s house-building targets.
Barratt Redrow announced this morning that it now plans to complete between 17,500 and 17,900 homes in the current financial year, down from a previous goal of 17,700-18,200.
It blamed “continued planning delays” for holding back its activities.
The company aso beat market expectations by reporting adjusted pre-tax profits of £572.8. for the year to 28 June.
Its shares have jumped over 8% in early trading, making Barratt the top riser on the FTSE 100 this morning.
The Bank of England isn’t only setting interest rates tomorrow.
The UK central bank is also deciding whether to slow – or even pause – its sale of government bonds bought after the financial crisis and during the Covid-19 pandemic.
Those sales, through a process called ‘quantitative tightening’, are controversial as a) they’re pushing up UK borrowing costs, and b) the Bank is making a loss on the process.
The City concensus forecast is that the Bank will slow its bond sales to £50bn a year, down from £70bn. It could even stop selling long-dated bonds altogether.
Professor Costas Milas of the University of Liverpool suggests the Bank could even combine a QT change with a surprise rate hike tomorrow:
The big danger is that disruption to oil supplies causes an “energy-driven economic shock”, warns George Lagarias, chief economist at Forvis Mazars.
And there’s very little the Bank of England can do to stop that, Lagarias explains:
UK gilt yields are falling
Rising inflation adds to the challenges facing John Healey as he prepares his first budget.
But the chancellor could be cheered by a peek at the bond markets today, where UK government borrowing costs are falling!
The yield, or interest rate, on short and long-dated UK debt are both dropping today. Ten-year gilt yields, which hit the highest since 2007 this week, are down 5 basis points (0.05 of a percentage point) at 5.35%.
This might indicate that the markets are a little less concerned about the outlook for UK inflation, as core CPI (which strips out food and energy) was unchanged at 2.6% in August.
Rising inflation will make life even tougher for those who are struggling to pay for essentials such as food and energy.
Edward Ware, head of influencing at the Money Advice Trust, the charity that runs National Debtline, says:
Looking further ahead, the financial markets are pricing in at least four UK interest rate rises by the end of 2027.
That would lift Bank rate to 4.75%.
At one stage on Monday, the markets briefly priced in a rise to 5% (implying five quarter-point increases).
Susannah Streeter, chief investment strategist at Wealth Club, says:
The UK increasingly has a stagflationary flavour, warns analysts at Capital.com, saying:
But, they add, a wage-price spiral does not appear to be developing, so the majority of Bank of England policymakers could continue to be patient and resist voting for a rate rise.
Capital.com explains:
Bank of England expected to hold interest rates despite rise in inflation
The Bank of England is expected to leave UK interest rates on hold tomorrow, despite inflation rising to 3.1% this morning.
Many economists are predicting this morning that the Bank will vote to maintain Bank Rate at 3.75% at midday on Thursday, when it’s next monetary policy decision is due.
The latest money market pricing shows that a ‘no change’ decision is an 80% probability, with just a 20% chance that the Bank hikes rates to 4%.
The Bank’s remit is to keep inflation at 2% in the medium term, so policymakers won’t want to see CPI over 3%!
But…James Smith, developed markets economist at ING, says there is “very little sign” that the energy shock is broadening out to other parts of the inflation basket, writing:
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, predicts the Bank will hold rates this week, but might be forced to increase borrowing costs if inflation rises to 4%.
Pugh says:
UK inflation rate higher than Germany and France
The UK has a worse inflation problem than the two largest eurozone economies
The UK’s CPI inflation rate of 3.1% was higher than the first (or “flash”) estimates of inflation for France (2.7%) and Germany (2.9%) in August, the ONS reports.
But the US is suffering even more, with an inflation rate of 3.4% in August.
City consultancy Capital Economics says there is a “striking lack of any strengthening in domestic inflation” in today’s CPI report.
They told clients:
Food and drink inflation remained low in August.
The ONS reports that the 12-month inflation rate for food and non-alcoholic beverages was 1.3% in August 2026, unchanged from July. It was last lower than this in September 2021.
Prices of chocolate confectionery rose by less than a year ago, while meat prices fell slightly in August.
