Inflation in the United Kingdom reached its highest level since the onset of the conflict in Iran, driven largely by a significant increase in petrol and diesel prices. According to the Office for National Statistics (ONS), annual inflation rose to 3.1 percent in August, up from 2.9 percent in July, aligning with economists’ expectations and marking the highest rate since March.

The acceleration in inflation primarily reflects the impact of escalating tensions in the Middle East, now in their seventh month, which have pushed crude oil prices above $105 per barrel. This has, in turn, driven energy costs higher across the UK. The average price of petrol increased by 9 pence to 161.3 pence per litre, the highest since November 2022, while diesel prices surged by 14.2 pence to 181.8 pence per litre over the same period.

Chancellor John Healey acknowledged the wider effects of the conflict, noting that the war is influencing inflation globally and affecting household expenditures on essentials such as fuel and groceries. ONS chief economist Grant Fitzner highlighted that rising petrol and diesel prices were the main contributors to the inflation increase, compounded by higher airfares, particularly for long-haul flights. He added that rising oil and petrol prices have increased both raw material costs and prices for factory output.

Core inflation, which excludes volatile food and energy prices, remained steady at 2.6 percent annually, while services inflation held at 3.4 percent. Food inflation remained at a five-year low of 1.3 percent.

Despite inflation exceeding the Bank of England’s 2 percent target for more than two years, members of the central bank’s rate-setting committee were widely expected to maintain the current interest rate at 3.75 percent in their upcoming meeting. Economists expressed cautious views regarding further rate hikes this year. ING’s James Smith noted there was no clear indication from the latest data to warrant an immediate increase, suggesting that the current energy-driven inflation shock had not yet spread broadly across other sectors.

Yael Selfin, chief economist at KPMG UK, cautioned that the Bank of England will remain vigilant about the risk of persistent above-target inflation influencing wage demands and pricing behaviour. While such effects have not yet become evident, she indicated the possibility of rate increases later in the year if inflation pressures do not ease.

In financial markets, yields on UK government bonds surged to their highest levels in nearly two decades amid a wider global sell-off linked to concerns over sustained inflation following the Gulf region conflict. Following the latest inflation release, the yield on the 10-year UK government bond eased slightly to 5.321 percent.