Deutsche Bank’s Sanjay Raja notes that United Kingdom (UK) inflation rose in August, with headline Consumer Price Index (CPI) at 3.1% year-on-year, its highest since December last year. While Core CPI and food inflation remained subdued, energy and services prices showed worrying strength. Raja highlights that inflation is running above Bank of England (BoE) projections and expects CPI to approach 4% around year-end, complicating policy decisions.

Inflation ascent raises policy questions

“UK inflation did what most forecasters thought it would in August: it went up. Headline CPI rose to 3.1% y/y – marking its highest print since December last year.”

“First, to state the obvious, inflation is on the rise. Energy prices made the biggest positive contribution to headline CPI in August, as pump prices rose by 7% m/m and heating oil prices also rose by 13% m/m. With Brent prices still picking up, more pain for households is likely with further rises in pump prices expected.”

“Second, there were some worrying trends in services price momentum. Private rents saw their biggest monthly jump since November 2024 (0.49% m/m). Catering prices also jumped by its highest rate since February this year at 0.45% m/m. Health services were up 0.4% m/m. While headline metrics tell one story, there is another: cost of living pressures is intensifying.”

“Third, relative to the Bank of England’s projections, inflation momentum is running hotter than expected. Indeed, headline CPI is now 0.25pp above the Bank’s forecast. Services CPI sits 20bps above the Bank’s projection. The one point of comfort for the Bank will be on food inflation which continues to buck the trend. Food inflation (including non-alcoholic beverages) sat still at 1.3% y/y – nearly 0.7pp below the Bank’s forecast.”

“Bottom line, inflation is on the ascent with an unknown destination. Events in the Middle East continue to add to inflationary pressures. On our estimates, the upcoming Ofgem Price Cap is due to rise by over 20% in January. Food prices, whilst weak today, remain poised to rise on the back of the recent heatwaves, droughts, and a potential El Niño event. For the Bank of England, its job to keep inflation at 2% has become harder. Our own projections point to CPI on course to get close to 4% around the turn of the year. Rates may be restrictive, but the key policy question for the MPC will remain: are they restrictive enough? Risk management considerations have become stronger, and the likelihood of rate hikes have strengthened of late.”