UK inflation holds at 3.8% in August, complicating Bank of England's rate outlook

UK consumer price inflation held steady at 3.8% in August, the Office for National Statistics said, leaving headline inflation near its highest point so far this year and complicating the Bank of England’s plans for cutting interest rates.

The annual increase in the Consumer Prices Index (CPI) matched July’s reading and remains well above the Bank of England’s 2% target. Core inflation, which strips out volatile items such as food, energy and alcohol, eased slightly to 4.0% from 4.2% a month earlier, while services inflation slowed to 4.9% from 5.2%.

The ONS cited a fall in airfares after a spike the previous month as one factor offsetting higher petrol and diesel prices in August. Food and drink inflation rose to 5.1%, its highest rate in 18 months, with price increases recorded across a range of items including vegetables, cheese and fish. Chocolate prices jumped 15.4%, and notable rises were also seen in beef, butter and coffee.

Chancellor Rachel Reeves said she understood families were under strain and pledged to bring costs down and support those facing higher bills. Shadow Chancellor Sir Mel Stride said the level of price growth was "deeply worrying for families" and accused Labour’s tax policies of adding to inflationary pressures.

Analysts and economists said the persistence of inflation above target makes further base-rate cuts less likely in the near term. The Bank of England reduced its base rate to 4% in August, but the Monetary Policy Committee (MPC) has signalled caution as price pressures remain "sticky." Market-implied probabilities, based on Refinitiv data, assign only about a one-in-three chance that the bank will cut rates by the end of the year.

Laith Khalaf, head of investment analysis at AJ Bell, said the UK faced an "inflation problem" that was keeping the central bank cautious. "While inflation is nowhere near as bad as it was, prices are still rising at an uncomfortable pace, so there is waning expectation of a rate cut at any point this year," he said.

Rob Wood, chief UK economist at Pantheon, forecast that headline inflation would stay above 3% until April 2026 and that the MPC would likely "stay on hold for the rest of this year at least." Victoria Scholar, head of investment at Interactive Investor, said inflation might push higher in the next monthly reading before beginning to pull back and warned that elevated inflation raises the prospect of a "higher-for-longer" interest-rate environment.

Higher inflation affects households, borrowers and savers in different ways. For mortgage holders, rising or persistent inflation typically delays hopes of rate relief. Ben Thompson, deputy chief executive of the Mortgage Advice Bureau, said the latest reading "suggests that the bumpy ride may be leveling out" and that many in the market still believe the peak in official rates may be near. Nevertheless, he added, hopes of another base-rate cut this year "now look decidedly optimistic."

Savers face an erosion of real returns when inflation outpaces interest on deposits. Alice Haine, a personal finance analyst at Bestinvest, said stubborn inflation was no boon for savers: while a pause in rate cuts could slow the disappearance of higher savings deals, the combination of easing savings rates and elevated inflation reduces the chance of real, inflation-beating returns.

The composition of the CPI release provides signals on where price pressures are concentrated. Services inflation — often seen as a bellwether for more entrenched wage-driven inflation — remains high even as it edges down. Food price rises are currently a key contributor to the headline figure, adding pressure to household budgets.

Inflation has come down substantially from the peaks recorded in late 2022, when CPI reached 11.1% in October of that year. It fell to a three-year low of 1.7% in September 2024 before rising steadily through 2025 to its current level. The Bank of England had expected a modest peak of about 3.7% in September but the latest reading suggests that decline may be slower than forecast.

The policy implications are straightforward: if inflation remains above target, the MPC is likely to keep policy restrictive for longer to ensure price pressures subside. That approach would help bring down inflation but could weigh on borrowing, spending and the housing market.

For consumers, the immediate effect is lived in supermarket bills, fuel costs and household budgets. For investors and savers, the key question is whether real returns — nominal returns adjusted for inflation — can be maintained. For policymakers, the priority is to judge how persistent the recent rise in prices will be and to calibrate interest rates accordingly.

The ONS will publish further monthly data that could confirm whether August represents a temporary pause or the start of a longer period of elevated inflation. Until then, economists and markets will monitor wage growth, energy and food prices, and international developments that could affect import costs as they reassess the likely path for Bank of England policy.