UK

UK set for unwelcome rise in August inflation fuelled by higher petrol prices

UK inflation is expected to have accelerated in August for the first time in six months (Joe Giddens/PA)
UK inflation is expected to have accelerated in August for the first time in six months (Joe Giddens/PA) UK inflation is expected to have accelerated in August for the first time in six months (Joe Giddens/PA)

UK inflation is expected to have accelerated in August for the first time in six months in an unwelcome reversal of the recent slowdown in the cost-of-living crisis.

Official figures are predicted to show an increase in Consumer Prices Index (CPI) inflation to 7.1% in August, up from 6.8% in July, economists believe.

A higher-than-expected increase could present a headache for Bank of England policymakers who are due to meet this week to decide whether to push through another interest rate hike. The announcement is due on Thursday.

A sharp rise in petrol prices is expected to fuel inflation last month, driven by a rebound in oil prices amid cuts in production in Russia and Saudi Arabia.

Motorists have been warned over rising fuel prices as the cost of a barrel of oil approached 100 US dollars this week. Before the start of this month, the highest oil price of the year was 88 US dollars in January.

Bank of England Governor Andrew Bailey acknowledged earlier this month that fuel prices went down in August last year but up this August, which could lead to a “tick-up” in the latest inflation figures.

The Bank’s own forecast previously predicted that CPI inflation would rise to 7.1%.

ECONOMY Inflation
ECONOMY Inflation The UK inflation rate is expected to rise in August for the first time since February (PA Graphics)

But it would mark a step back from the recent slowdown in inflation amid scrutiny over the economy and the Government’s pledge to halve CPI to 5.3% by the end of the year.

And a worse-than-expected inflation reading could throw the path for UK interest rates into question.

A rise in alcohol duty, which came into effect from the start of the month, could also have put upward pressure on prices, economists said.

A change in the way alcoholic drinks are taxed led to hikes of up to 20% on wine, and most spirits are going up in price, although some low-strength drinks became cheaper.

Nevertheless, food price inflation is expected to ease further in August, having slowed in July from the decades-high levels hit earlier in the year.

Consumers tightening their belts under the weight of higher mortgage rates and rents could mean service price inflation is beginning to slow, according to Investec Economics.

Interest rates
Interest rates The Bank of England’s policymakers are due to announce their decision on UK interest rates on Thursday (Jordan Pettitt/PA)

Most economists think that the Bank will raise interest rates again on Thursday, bringing the base rate to 5.5%, after which it may end the cycle of interest rate rises.

It comes as the Organisation for Economic Co-operation and Development (OECD) forecast that the UK economy is set to witness the highest inflation rate of any G7 advanced economy.

The OECD said it expects UK inflation to be 7.2% in 2023, which would be the fastest rate across the G7 and the third fastest across the G20.

Chancellor Jeremy Hunt said: “It is only by halving inflation that we can deliver higher growth and living standards.”

The Government in January pledged to halve inflation from 10.7% to around 5.3% by the end of the year.