Inflation in the United Kingdom rose to 3.1 percent in August, up from 2.9 percent in July, according to data released by the Office for National Statistics (ONS). The increase, driven primarily by higher petrol prices and rising household energy costs, exceeded the Bank of England’s (BoE) 2 percent inflation target and has kept open the possibility of a rate hike later this year.

The higher inflation figure aligns with economists’ forecasts and adds pressure on the BoE's Monetary Policy Committee (MPC), which was scheduled to meet to set interest rates. While the MPC is widely expected to maintain the current base rate of 3.75 percent at this meeting, market observers anticipate that the committee may signal a potential increase as soon as November.

The decision comes amid ongoing uncertainty related to the recent energy price shocks, partly linked to geopolitical tensions in the Middle East. Despite these challenges, the MPC has so far opted for a cautious "wait-and-see" strategy, awaiting further evidence on whether inflationary pressures are becoming entrenched across the economy. The July MPC meeting highlighted divisions among members, with a 6-3 vote to hold rates steady despite surging oil and gas prices.

Yael Selfin, chief economist at KPMG, noted that the persistent rise in energy costs is testing the BoE’s current stance. She warned that absent significant improvements in the economic outlook, the risk of a rate hike before the end of the year is growing.

The global context of rising energy costs has already prompted other major central banks to act, with the European Central Bank raising interest rates twice since June and the U.S. Federal Reserve increasing rates for the first time since 2023 just recently.

The rise in oil and gas prices has also had fiscal implications in the UK. Government bond yields have surged, reducing Chancellor John Healey’s fiscal flexibility ahead of the October Budget, an issue that poses additional challenges for Prime Minister Andy Burnham’s administration.

Despite the headline inflation increase, core indicators suggest that energy price pressures have not extensively spread through the broader economy. Services inflation, which captures domestic price pressures and is closely monitored by the MPC, remained steady at 3.4 percent in August, slightly below economists’ expectations. Core inflation, excluding volatile items such as energy and food, held at 2.6 percent, indicating moderate underlying inflationary trends.