UK inflation holds at highest rate since start of 2024

Other economic data have suggested that price pressures could linger

UK inflation held at the highest level in more than 1 1/2 years in August, another uncomfortable reading that is likely to keep Bank of England officials wary over cutting interest rates further.

Consumer prices rose 3.8% from a year earlier, the same pace as in July, the Office for National Statistics said on Wednesday, a day before the BOE announces its latest interest-rate decision. It was in line with the forecasts of both the BOE and private-sector economists. Cheaper air fares were offset by motor fuel and prices at restaurants and hotels. Food inflation continued to rise.

Services inflation slowed to 4.7%, still above levels the BOE is comfortable with.

The figures underscore the headache facing the BOE officials. While the labor market is cooling, policymakers fear elevated price pressures are fueling inflation expectations among consumers. The central bank expects inflation to peak at 4% in September, double its 2% target.

The Monetary Policy Committee is expected to leave rates on hold at 4% tomorrow and could lay the groundwork for a longer pause in borrowing costs, ending the once-a-quarter cutting pace it has maintained since August last year. Markets expect rates to remain on hold this year and are only fully pricing one more reduction by the end of 2026.

Other economic data have suggested that price pressures could linger. There are signs that the jobs market has stabilized in recent months, while growth in gross domestic product has been more robust than the bank expected.

Some rate-setters have become unnerved by a rise in household inflation expectations that threatens to cause a feedback loop by fueling wage demands that then lead to more price increases. They are monitoring sharp rises in food bills given their salience for households.