UK inflation holds at 3.8% in August, keeping pressure on Bank of England policy
Consumer prices rose at the same pace as July, driven by food costs, leaving inflation well above the BoE’s 2% target as the central bank navigates recent rate cuts and economic weakness
Consumer price inflation in the UK stood at 3.8% in the year to August, the Office for National Statistics reported, matching the rate recorded in July and leaving inflation substantially above the Bank of England’s 2% target.
The persistence of above-target inflation complicates policy choices for the Bank, which has cut interest rates five times since August 2024 and currently sets its key rate at 4%. The central bank has said it will move cautiously on further reductions as it balances the goals of dampening price growth and supporting a fragile economy and labour market.
The ONS calculates the headline Consumer Prices Index (CPI) by tracking price changes across a broad, regularly updated “basket” of goods and services. The CPI figure for August was accompanied by a slightly lower reading for core inflation, which excludes food and energy, at 3.6% in the 12 months to August compared with 3.8% in the year to July.
Food and non-alcoholic beverages were a major contributor to the headline rate. Food inflation rose to 5.1% in the year to August, up from 4.9% in July, with vegetables, milk, cheese, eggs and fish among the items showing notable price increases. Economists and retailers have pointed to supermarkets passing on higher labour costs driven by increases in the minimum wage and employers' National Insurance contributions as one factor behind recent food-price rises.
Inflation has fallen markedly from the 11.1% peak reached in October 2022, but economists emphasise that a lower inflation rate means prices are rising more slowly, not that they are falling. The Bank of England’s policy tightening in 2022 and 2023 — which took the official bank rate as high as 5.25% — was intended to curb the rapid rise in prices that followed elevated energy demand after the Covid-19 pandemic and supply disruptions linked to Russia’s invasion of Ukraine. Since August 2024 the Bank has reversed course, trimming rates in five steps to 4% as it seeks to shore up economic activity amid a flat growth backdrop and a softer jobs market.
Bank of England Governor Andrew Bailey and other policymakers have repeatedly signalled caution about the pace of future cuts. The committee’s August decision to reduce rates by a quarter percentage point was narrowly split, with a 5-4 vote and an unprecedented second vote prompted by one policymaker who favoured a larger 0.5 percentage-point reduction. That split highlighted the finely balanced nature of recent deliberations and has made analysts less certain that a further cut will be delivered at the Bank’s November meeting.
In its latest Monetary Policy Report, the Bank forecast inflation would peak at 4% in September, higher than previously projected, reinforcing the view that policymakers face a difficult trade-off between restoring price stability and supporting growth and employment. Markets widely expect the Bank to hold rates at its September meeting while it assesses incoming data and the potential impact of fiscal policy announcements, including measures due in the Chancellor’s Budget on 26 November.
Internationally, central banks are also navigating divergent inflation dynamics. Inflation in the eurozone was 2% in August, matching July, after the European Central Bank cut its main rate from an all-time high in 2024 to 2% by July 2025. In the United States, consumer inflation rose to 2.9% in August from 2.7% in July; the Federal Reserve has held its policy rate in a range of 4.25% to 4.5% following earlier cuts and is widely expected by markets to consider further reductions in September as concerns about a weakening labour market weigh on policymakers.
Global developments such as trade measures, geopolitical tensions in the Middle East and the effects of external shocks remain risks to the outlook for UK prices and interest rates. The Bank has highlighted the unpredictability of factors including US tariff policies and regional conflicts as complicating its forecasts. For households and businesses, the immediate outlook will depend on the interaction of food-price pressures, wage growth and the pace at which the Bank adjusts policy in response to evolving domestic and international conditions.