UK inflation holds at 3.8%, piling pressure on Chancellor Rachel Reeves ahead of Budget

UK consumer price inflation held steady at 3.8 percent in August, data showed Wednesday, a reading that is likely to rule out a near-term Bank of England interest-rate cut and adds fresh fiscal pressure on Chancellor Rachel Reeves as she prepares for the autumn Budget.

The Office for National Statistics reported that headline consumer price index (CPI) inflation was unchanged from July and in line with economists' expectations. Core inflation — which excludes energy, food, alcohol and tobacco — eased slightly, according to the ONS, but remained well above the Bank of England's 2 percent target.

The persistence of inflation at nearly double the Bank's target is likely to extinguish hopes of a rate cut this week, economists said, keeping borrowing costs higher for longer. Markets and businesses had been watching August CPI closely for clues about the Bank's next move.

The inflation update arrives as officials and forecasters brace for what some expect will be downgraded productivity forecasts from the Office for Budget Responsibility ahead of the Budget. That downgrade could widen an existing fiscal gap, with financial-sector estimates suggesting a shortfall in the order of £9 billion to as much as £18 billion, depending on the scale of the productivity revision.

“Allan Monks, UK economist at JPMorgan, said even shaving 0.1 or 0.2 percentage points from productivity would leave a hole of between £9 billion and £18 billion,” according to reporting in the Financial Times. Analysts and some officials have indicated the OBR may revise down output-per-worker projections after official statistics showed productivity fell in the second quarter compared with a year earlier.

The combination of sticky inflation and weaker productivity complicates the Chancellor's task of balancing support for public services and investment with commitments on tax and borrowing. A larger-than-anticipated productivity downgrade would reduce the projected tax revenues flowing into public coffers, forcing ministers to identify savings or alternative revenue measures ahead of the Budget.

Policymakers will be watching forthcoming ONS releases and the OBR's fiscal forecast closely for an updated assessment of growth, labour market dynamics and public finances. In the short term, the steady CPI reading reinforces the Bank of England's case for maintaining current interest-rate settings until clear and sustained improvement in inflation is evident.