UK inflation accelerated to 3.1 per cent in August, moving further above the Bank of England’s 2 per cent target and intensifying the dilemma facing policymakers ahead of Thursday’s interest rate decision.
Official figures showed inflation rising from 2.9 per cent in July, with the increase driven largely by higher energy and transport costs. Motor fuel prices rose 23 per cent year on year, while electricity, gas and other household fuel costs increased 6 per cent.
The figures came as financial markets reassessed the outlook for monetary policy. Gilt yields fell across the curve following the release, with the 30-year yield at 5.907 per cent after touching a 28-year high the previous day. The 10-year yield stood at 5.365 per cent.
Nigel Green, chief executive of financial advisory group deVere Group, said markets were pricing in more than an 80 per cent probability that the Bank would keep its key rate at 3.75 per cent on Thursday, with expectations for a move shifting towards November.
“It’s the likely outcome, and it’s also the easier decision politically, but it’s not obviously the safe one.
“Inflation just moved back above target on the back of an energy shock that shows no sign of fading, and waiting for one more month of data before acting has a cost.”
Green argued that the Bank’s experience during the inflation surge of 2021 should inform its response.
“It held rates near zero through 2021 as inflation built, only started raising them in December that year, and still watched inflation reach 11.1% within the following 12 months.
“Waiting for certainty last time made the eventual response bigger and more painful than it needed to be.”
He warned that a similar pattern could emerge if policymakers regard the latest increase as temporary.
“If the committee treats this month’s number as one to look through, and the next one confirms the trend, it ends up delivering in November the increase it could have signalled now, except from a worse starting point and with markets already unsettled.”
Green also pointed to elevated borrowing costs as a warning signal.
“Gilt yields at levels last seen almost three decades ago are a signal worth taking seriously.”
He added: “A hold on Thursday should not be read as good news. Fuel and energy costs are still climbing, gilt yields are still elevated, and a bigger move in November stays on the table.”
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