LONDON (AP) — Inflation in the United Kingdom rose to a five-month high as the aftershocks of the Iran war continued to ratchet up fuel prices, official figures showed Wednesday, an increase that will pressure the Bank of England to hike interest rates again over coming months.
The Office for National Statistics said rising prices at the pump and airfares were largely behind the increase in the U.K.’s consumer prices index to 3.1% in August from 2.9% the month before. The increase moved inflation further away from the Bank of England’s 2% inflation target.
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However, rate-setters are widely expected to keep the bank’s main interest rate at 3.75% when they conclude their meeting on Thursday as a majority of the nine-member Monetary Policy Committee appear to want to see whether higher prices are feeding into higher wages that could further stoke inflationary pressures. A soft labor market is currently keeping wage demands in check.
“August’s inflation increase is unlikely to trigger a rate hike tomorrow, as policymakers will take some comfort from a cooling jobs market,” said Suren Thiru, chief economist at ICAEW. “However, it will probably harden the Bank’s hawkish tone and leave the door open to higher rates later this year.”
Interest rates in the U.K. had been trending downward from a 15-year high of 5.25% until the U.S. and Israel attacked Iran in late February. The Iran war led to sharp increases in oil and gas prices, partly because the crucial Strait of Hormuz has been largely closed to traffic ever since.
As well as impacting the cost of personal loans and mortgages, the uptick in interest rate expectations is a growing problem for the British government as the servicing of its debt accounts for a higher proportion of its spending.
Prime Minister Andy Burnham insisted the British economy is still showing “resilience across the board” and that next month’s annual budget statement would take a prudence-first approach.
“We won’t take risks with people’s living standards or with the economy as a whole," he said.
