UK Inflation Surges to 3.1%, Challenging BoE Projections

UK inflation rose to 3.1% year-on-year in August, its highest since December last year, according to Deutsche Bank's Sanjay Raja. This is a significant increase from previous projections and puts pressure on the Bank of England (BoE) to make policy decisions.

Raja notes that energy prices were the biggest contributor to headline CPI, with pump prices rising by 7% month-on-month and heating oil prices increasing by 13% month-on-month. With Brent prices still rising, further pain for households is likely, with more rises in pump prices expected.

Services price momentum also showed worrying trends, with private rents seeing their biggest monthly jump since November 2024 (0.49% m/m), catering prices increasing by its highest rate since February this year at 0.45% m/m, and health services up 0.4% month-on-month.

The BoE's projections are now being challenged, with headline CPI running 0.25 percentage points above the bank's forecast, and services CPI sitting 20 basis points above the projection. Food inflation remains subdued, but is poised to rise due to recent heatwaves, droughts, and a potential El Niño event.