UK inflation holds at 3.8% in August, leaving Bank of England poised to pause rate cuts

Inflation in the United Kingdom held steady at 3.8% in the year to August, official figures showed Wednesday, leaving the rate nearly double the Bank of England’s 2% target and reinforcing market expectations that the central bank will keep interest rates on hold at its meeting Thursday.

The Office for National Statistics reported that food and drink prices rose for the fifth consecutive month, while airfares fell sharply after a large spike in July. Economists had broadly expected a modest rise in August, and the flat headline rate underlines the persistence of price pressures that have weighed on household budgets and the government’s standing.

Treasury Chief Rachel Reeves said she understood the strain facing families and stressed her commitment to bringing costs down while supporting those facing higher bills. Reeves, whose Labour government entered office in July 2024, has seen party poll ratings slide amid public concern over the cost of living. She will face heightened scrutiny in the run-up to her annual budget on Nov. 26, when she is widely expected to announce tax rises to bolster revenues alongside measures aimed at easing household pressures.

Some critics have pinned blame for this year’s inflation on Reeves, arguing that her decision to increase taxes on businesses to close a budget gap prompted companies to raise prices. Such arguments have become a part of the wider political debate as officials weigh fiscal and monetary policy choices.

Markets appeared to take the data as confirmation that the Bank of England would refrain from cutting borrowing costs at this week’s meeting. Since August 2024, the central bank has reduced its main interest rate gradually every three months after unwinding an earlier spike in borrowing costs tied to the fallout from Russia’s invasion of Ukraine. The bank cut its policy rate to 4% in August and was generally expected not to reduce it further at the September meeting.

Whether additional cuts will follow remains contested. If the Bank of England continues its quarterly approach to rate reductions, the November meeting could see another cut. However, many economists are divided because inflation has proven stickier than earlier in the year, a dynamic analysts attribute in part to relatively robust wage growth.

“Several months of disappointing data has highlighted the U.K.’s unwanted position as an international outlier for ‘sticky’ inflation, with the highest headline inflation of any G-7 economy,” said James Smith, research director at the Resolution Foundation think tank.

Policymakers face a balancing act: easing monetary policy could help support growth but risks entrenching higher inflation expectations, while keeping rates elevated longer would maintain borrowing costs for households and businesses. The persistence of food inflation particularly affects low- and middle-income households, which spend a larger share of income on groceries, amplifying the political salience of price trends.

The ONS figures and the near-term outlook for interest rates will feed into forecasts and political strategy as the government prepares its fiscal plans for late November. Many forecasters expect inflation to edge back toward the 2% target over the coming year, which would relieve some cost-of-living pressures if realized, but the timing and path remain uncertain amid mixed economic signals.

For now, the steady August reading leaves the Bank of England with little clear evidence to justify immediate further easing, and the central bank is widely expected to signal caution as it assesses whether recent data mark a durable decline in inflation or another pause before further adjustments.