UK inflation rises to 3.1% as motor fuel prices jump by almost a quarter

# What happened

Average petrol rose by 9.1p between July and August to 161.3p per litre, the highest since November 2022. Diesel climbed by 14.2p to 181.8p per litre. Air fares also contributed, with a 6.2% month-on-month increase, especially on long-haul routes.

# Why it matters now

Second, the government must weigh fiscal choices ahead of the 28 October budget. Prime Minister Andy Burnham said the budget will include "difficult decisions" to keep the economy on track while avoiding risks to living standards. Rising global oil prices linked to the Middle East conflict are cited as the main external shock.

# What underlies the rise

The inflation spike reflects external energy shocks rather than a broad domestic overheating:

• Motor fuel and crude oil prices rose after intensified fighting in the Middle East, pushing global oil above $106 a barrel in recent trading mentioned by commentators.
• Core inflation, which strips out volatile items such as food and energy, held at 2.6%. Services inflation remained steady at 3.4%.
• UK labour market indicators showed slowing wage growth and higher unemployment in the latest data, which could limit the risk of a persistent wage-price spiral.

# Policy implications and market reaction

Monetary policy: The Bank must balance a headline uptick driven by energy with signs of cooler underlying inflation and a weakening jobs market. That mix reduces the case for aggressive tightening but sustains some pressure to act if energy-driven inflation persists.

Fiscal policy: Higher borrowing costs for the UK—driven by global bond market moves and a rise in long-term yields—constrain the government's room to maneuver. Officials face calls to offer relief to squeezed households while managing public finances.

Markets: Bond yields and borrowing costs have moved higher in response to energy-driven inflation globally. UK long-term borrowing costs rose toward multi-decade highs amid intense selling pressure in bond markets.

# What to watch next

• Bank of England decision this week and any hint about the path of rates beyond the current 3.75%.
• The 28 October budget: whether it includes measures targeted at households facing higher energy and fuel costs, and how it addresses rising borrowing costs.

# Bottom line

The August inflation rise is concentrated in energy-related items, particularly motor fuel. That limits the immediate case for a broad-based inflation breakout, but it increases near-term pressure on both the Bank of England and the government because higher fuel and energy prices hit household budgets and push up borrowing costs.