UK inflation rose in August, with headline Consumer Price Index (CPI) reaching 3.1% year-on-year, its highest level since December last year, according to Deutsche Bank’s Sanjay Raja [1]. This marks an increase from July's 2.9% and aligns with market expectations [2]. While core CPI remained unchanged at 2.6% year-on-year, energy prices contributed significantly to the headline figure, with pump prices rising 7% month-on-month and heating oil up 13% month-on-month [1]. Services prices also showed strong momentum, with private rents jumping 0.49% month-on-month—the largest increase since November 2024—and catering prices rising 0.45% month-on-month [1]. Health services increased by 0.4% month-on-month, highlighting intensifying cost-of-living pressures [1].
Producer prices outpaced forecasts, as input Producer Price Index (PPI) accelerated to 6.1% year-on-year from 4.9% in July, beating the consensus of 5.4%. Output PPI rose to 3.7% year-on-year from 3.1%, above expectations of 3.3% [2]. Despite these figures, the Bank of England (BoE) is expected to keep rates unchanged at its Thursday meeting, with Governor Bailey recently dismissing the inevitability of rate hikes, dampening hopes for immediate tightening [2]. Deutsche Bank projects headline CPI could approach 4% by year-end, further complicating BoE policy decisions [1].
The Euro (EUR) edged higher against the British Pound (GBP) following the CPI release, with the EUR/GBP pair rising about 10 pips to session highs above 0.8570, extending its recovery from lows near 0.8550 but remaining below last week’s highs at 0.8600 [2]. However, the Euro’s gains were limited by a moderate risk-off mood and high oil prices, as Brent Oil remains steady above $100 amid ongoing Middle East tensions [2].
Looking ahead, ING analyst Francisco Pesole sees limited scope for further Euro depreciation, noting that risks at the BoE meeting are 'on the dovish side.' Pesole suggests BoE doves will emphasize that price pressures are not extending beyond energy, limiting the likelihood of a hawkish shift [2]. ING warns that most risks for EUR/GBP are on the upside in the coming weeks, citing monetary policy, potential fiscal headlines ahead of the late October budget, and political pressures regarding independence referendums in Scotland, Wales, and Northern Ireland [2].
Deutsche Bank notes that the upcoming Ofgem Price Cap is expected to rise by over 20% in January, and food prices, though currently subdued, may increase due to recent heatwaves, droughts, and a potential El Niño event [1].
CONCLUSION
UK inflation continues to rise, reaching 3.1% in August and outpacing Bank of England projections, with energy and services prices driving the increase. Despite strong inflation and producer price data, the BoE is expected to maintain current rates, while the Euro has gained modestly against the Pound. Analysts see limited downside for EUR/GBP and anticipate further inflationary pressures and policy challenges ahead.