UK Inflation Hits 3.1%, Markets Expect Higher Interest Rates

UK inflation rose to 3.1% in August, surpassing the Bank of England's (BoE) July projection and causing market uncertainty ahead of its Thursday rate decision.

The Office for National Statistics reported that core inflation, which excludes volatile items like energy and food, remained steady at 2.6% for a fourth consecutive month.

Services inflation, on the other hand, increased to 3.4%, a closely watched gauge as it can reflect wage pressure. Despite this, fresh data showed wage growth near its weakest since 2020, which should help alleviate fears of self-reinforcing price rises.

Investors are putting pressure on the BoE, with markets pricing in a one-in-three chance of a quarter-point hike and two increases before the end of 2026. This 'higher for longer' path can keep fixed-rate mortgage prices from falling quickly or even push them up in short bursts, even if the BoE holds steady.