UK inflation ignites again as energy crunch puts central banks on high alert
Susannah Streeter, chief investment strategist, Wealth Club: “Inflation has slipped from the reins and is running higher again, and coaxing the price spiral down looks set to be painful. The headline CPI rate hit 3.1% in August, up from 2.9% in July, racing further away from the Bank’s 2% target. The impact of the war in Iran is showing up starkly, with higher crude prices feeding through to the pumps. It feels like Groundhog Day, with consumers once again feeling the pinch due to geopolitical events far beyond their control. The average price of petrol stood at 161.3 pence per litre in August 2026, which was the highest price recorded since November 2022. But since then they’ve ramped up even higher, and more increases look set to be on the way given that crude has jumped so sharply.
The picture is not uniformly grim though, with food inflation holding at 1.3% and services inflation stuck at 3.4%, while core CPI, which strips out volatile food and fuel moves, remained at 2.6%. But there will still be concerns that businesses will start passing higher energy costs on as higher prices for goods and services.
Given this ramp-up in consumer prices, the pressure on the Bank of England to raise rates is mounting, although a hold at 3.75% is still expected tomorrow. The bigger shift is happening in expectations for the months ahead, with markets now pricing in multiple hikes as the energy shock threatens to keep inflation elevated. That is going to pile on the financial pain for those looking to remortgage or get onto the housing ladder. With energy costs rising and borrowing costs looking set to surge higher, there looks set to be a fresh squeeze on spending, so consumers are going to become even choosier about where they spend their available cash.
Nevertheless, it appears investors have become used to this cycle of warnings about inflationary pressures, and are set to shrug off this latest snapshot. The FTSE 100 is set for some gains in early trading, while Wall Street futures also point to a sanguine opening even as attention is trained on the upcoming Fed meeting, with another hiking cycle in central bankers’ sights. The chronic energy crunch, combined with accelerated spending on the AI build-out, risks tipping stubbornly high inflation even higher. The feeling is that the Fed won’t be able to sit on its hands, and now an increase is widely expected – with a 92.4% chance of at least a 25-basis-point U.S. rate hike today being factored in. The big question is how high could they go – with multiple hikes now expected over the next year.
But there is a little relief on the energy front this morning, with crude prices dipping after US inventories unexpectedly rose. American crude stocks increased by 7.1 million barrels last week, confounding expectations for a draw, while gasoline and distillate inventories also climbed. Brent slipped briefly back below $108 a barrel as a result but has begun climbing again.
So there’s been some respite, but it was a small breather rather than the start of long-term relief. The underlying supply picture remains extremely tight, with a halt to crude exports at the Saudi port of Yanbu, due to drone attacks, adding to the concerns over how much crude can actually reach the market.
Every day appears to bring a fresh development in the conflict, making the supply picture even more fragile. Saudi Arabia’s air defences shot down a Houthi drone south of Mecca, with the threat to the holy city another ominous twist in the conflict. The Houthis deny targeting Mecca, but the incident brings the war into stark reality for the kingdom, showing that the threat is no longer confined to oil installations and shipping lanes, but is now reaching towards the heart of the country’s religious life.”