UK inflation holds steady at 3.8% in August

The UK’s inflation rate remained unchanged in August, with headline consumer prices rising by 3.8 per cent in the year to the month, according to the Office for National Statistics (ONS). The latest release signals that the pace of disinflation may be slowing, keeping pressure on policymakers as they weigh the next move on interest rates.

The Consumer Prices Index (CPI) was stable compared with July, while the broader measure that includes owner occupiers’ housing costs, CPIH, eased slightly to 4.1 per cent from 4.2 per cent. On a monthly basis, both CPI and CPIH rose by 0.3 per cent, the same increase recorded in August last year.

The ONS said the largest downward contribution to the monthly change came from air fares, which fell between July and August this year but rose over the same period in 2024. This easing was partly offset by higher prices in restaurants, hotels, and motor fuels.

Owner occupiers’ housing costs (OOH), which are a key component of CPIH, rose by 5.3 per cent in the year to August, down from 5.5 per cent in July. It was the seventh consecutive month of slowing growth, though housing remains one of the biggest contributors to headline inflation.

Food and non-alcoholic beverages continued to rise more sharply than the overall index, with prices up 5.1 per cent in the 12 months to August compared with 4.9 per cent in July. The ONS pointed to upward pressure from a range of categories, including dairy, meat, and non-alcoholic drinks.

Restaurants and hotels saw inflation rise to 3.8 per cent, up from 3.4 per cent in July, while clothing and footwear prices increased by 3.5 per cent, compared with 2.9 per cent previously.

Core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, provided a small measure of relief. Core CPI fell to 3.6 per cent from 3.8 per cent, and Core CPIH dropped to 4.0 per cent from 4.2 per cent. Analysts watch the core measure closely for underlying inflation trends.

Although headline inflation has come down significantly from the double-digit highs seen in 2022 and 2023, the persistence of price pressures in essential categories has raised concerns that returning to the Bank of England’s 2 per cent target will take longer than expected.

Markets are now widely expecting the Bank’s Monetary Policy Committee to hold interest rates steady at its next meeting. The bank has increased borrowing costs aggressively since late 2021, with the aim of anchoring inflation expectations and cooling demand.

The UK’s latest reading places inflation above that of some international peers. In August, euro area inflation stood at 2.4 per cent, while US inflation was 2.9 per cent. Both economies have seen a more pronounced deceleration in recent months, sharpening focus on why UK inflation is proving slower to retreat.

The ONS noted that while some price categories are showing clear signs of easing, others remain stubborn. With housing, food, and services continuing to rise faster than the headline average, the balance of pressures leaves inflation “stuck” at a level well above target.