UK inflation expectations rise sharply in August

UK inflation expectations rose sharply in August after declining in recent months, adding to evidence that renewed price pressure is affecting households’ outlook as policymakers assess the impact of higher energy costs.

The latest Citi/YouGov survey put expectations for inflation over the next 12 months at 3.9%, up from 3.4% in July. Expectations over a longer horizon increased from 3.7% to 4.1%, their highest level since April.

The change follows a renewed increase in measured inflation. Office for National Statistics figures showed the Consumer Prices Index rising by 2.9% in the 12 months to July, compared with 2.6% in June.

The detail was mixed. Core CPI, which excludes energy, food, alcohol, and tobacco, remained at 2.6%, while services inflation eased from 3.6% to 3.4%. Goods inflation increased from 1.7% to 2.2%, illustrating how different parts of the economy are experiencing price pressure at different rates.

Inflation expectations are closely watched because they can influence wage negotiations, pricing decisions, and household behaviour. Employees expecting living costs to rise may seek larger pay increases, while companies anticipating higher supplier, energy, or labour costs may be more inclined to adjust their own prices.

The Bank of England held Bank Rate at 3.75% at its July meeting, with six members of the Monetary Policy Committee voting to maintain the rate and three preferring an increase to 4%. Its next policy decision is due on 17 September.

The Bank has identified higher energy prices associated with conflict in the Middle East as a significant source of uncertainty. Its July Monetary Policy Report said the effect on the UK economy would depend on the scale and duration of the shock and how it spread through financial conditions, wages, and domestic prices.

The policy challenge is complicated by weakness elsewhere in the economy. Recruitment has remained subdued, the labour market has loosened, and private sector pay growth has moderated. Those conditions can reduce inflation pressure by limiting wage growth and companies’ ability to increase prices.

At the same time, renewed energy costs can raise prices even without strong domestic demand. Higher gas and electricity costs affect households directly and can also feed into manufacturing, transport, logistics, hospitality, and other energy-intensive activities. Companies may absorb some of those increases through margins or pass them into prices depending on competition and demand.

Longer-term expectations are particularly important because they provide an indication of whether the Bank’s 2% inflation target remains embedded in public perceptions. Survey expectations are not forecasts and do not mean inflation will necessarily reach the reported level, but a sustained increase can make the task of returning inflation to target more difficult.

The August rise therefore adds another data point to a monetary policy outlook already pulling in different directions. Higher headline inflation and energy costs argue for caution over rate reductions, while weaker employment conditions and easing domestic wage pressure limit the case for an aggressive response.

Companies making investment and financing decisions are exposed to the same uncertainty through borrowing costs. Expectations about the path of Bank Rate affect corporate lending, commercial property, development finance, acquisition funding, and the hurdle rates businesses use when considering capital spending.

Inflation assumptions also enter annual budgets more directly through salary reviews, supplier contracts, transport costs, rent negotiations, and pricing plans. A business that expects inflation to remain elevated may make different decisions about margins and expenditure from one expecting a quick return to the 2% target.

The September MPC meeting will take place with another set of labour market, business survey, and financial market information available. The August expectations increase does not determine that decision, but it adds to evidence that the inflation outlook has become less settled after the improvement seen earlier in 2026.