UK inflation rises to 3.1% as fuel prices surge

UK inflation climbed to 3.1% in August, driven by a sharp rise in petrol and diesel prices that is piling fresh pressure on household budgets.

The jump from 2.9% in July, reported by the Office for National Statistics on Wednesday, matches what City analysts had expected. It marks the first time inflation has exceeded 3% since March, pulling the rate further away from the Bank of England's 2% target.

At the pumps, drivers are feeling the immediate impact of the war in the Middle East. Global oil prices have climbed, pushing Brent crude past $100 a barrel. Consequently, average petrol prices jumped by 9.1p a litre between July and August to reach 161.3p—their highest level since November 2022. Diesel rose even faster, climbing 14.2p to average 181.8p a litre. Overall, motor fuel prices were up 23% compared to the same time last year.

For small business owners like Goran Raven, who runs a petrol station in Essex, the volatile wholesale market means thin margins and lower sales. Raven said his sales are about 20% lower than this time last year. "When the price goes up, we have to go up with it," he said, explaining that his business operates on single-digit pence margins per litre.

Pressure on household budgets

The rising cost of crude oil has also fed into factory gates, raising the cost of raw materials and manufactured goods. Airfares also surged, rising 6.2% between July and August during the peak summer holiday season.

Despite the pressure on transport and energy, there are signs that wider price pressures remain contained. Core inflation, which strips out volatile energy and food prices, held steady at 2.6% in August. Services inflation was also unchanged at 3.4%, while food and non-alcoholic drink price growth slowed to 1.1%.

For households, the rising cost of transport is colliding with high utility bills. Emma Ashfield, a nursery worker from Northern Ireland, said keeping up with basic bills is already leaving her family stretched. "You are trying to keep food on the table, clothes, trying to provide for them," she said. "You would basically need a second job."

With winter approaching, energy bills remain a key worry. Although the government is cutting VAT on electricity bills to zero from 1 October, saving a typical home around 45 a year, a simultaneous 4% rise in the energy price cap will add 60 to the average annual bill.

Interest rates and political battles

For the Bank of England’s Monetary Policy Committee, which announces its latest interest rate decision on Thursday, the data presents a delicate balancing act. While the benchmark rate currently sits at 3.75%, financial markets expect policymakers to hold rates steady tomorrow before potentially raising them later in the autumn.

The figures also complicate the task for Prime Minister Andy Burnham and Chancellor John Healey, who is drawing up his first Budget for next month. Healey blamed the Middle East conflict for driving up global energy prices but insisted the UK economy remains resilient, pointing to recent government measures like capping bus fares at 2 and cutting VAT on domestic electricity.