UK inflation remains nearly double target ahead of expected interest rate hold

Key Points

• UK inflation remains steady at 3.8%, nearly double the Bank of England's target rate of 2%, impacting public sentiment towards the government.
• The Bank of England is widely expected to keep interest rates on hold, following market trends influenced by the persistent inflation rate.
• Treasury chief Rachel Reeves plans to address cost-of-living pressures in her upcoming budget, amidst criticism over tax increases contributing to inflation.
• The UK has the highest headline inflation rate among G-7 economies, highlighting its struggle with "sticky" inflation as wage increases remain elevated.

LONDON (AP) — Inflation in the U.K. held steady at 3.8% in the year to August, official figures showed Wednesday, a day before the Bank of England is widely expected to keep interest rates on hold.

The Office for National Statistics found food and drink prices rose for the fifth month in a row, but airfares fell sharply after a big spike in July.

Though inflation remains nearly double the Bank of England's target rate of 2%, most economists had anticipated a modest increase in August.

Stubbornly high inflation has been one of the reasons why the Labour government's poll ratings have fallen sharply since it came to power in July 2024.

Treasury chief Rachel Reeves will be hoping inflation starts to drop down towards target, as many forecasters predict, in the year to come as it will relieve some of the cost-of-living pressures that are hurting households and undermining the government's support.

“I know families are finding it tough and that for many the economy feels stuck," she said after the figures were released. “That’s why I’m determined to bring costs down and support people who are facing higher bills.”

Reeves' economic plans will be in the spotlight over the coming weeks ahead of her annual budget on Nov. 26, where she is widely expected to increase taxes again to bolster revenues and simultaneously introduce policies to ease the cost-of-living pressures.

Many critics blame Reeves personally for the increase inflation this year, saying her decision to increase taxes on businesses to plug a budget hole prompted firms to up prices.

The inflation figures have cemented market expectations that the Bank of England will keep interest rates unchanged on Thursday.

Since it started cutting borrowing rates in August 2024 after the unwinding of the previous spike in inflation in the wake of Russia's invasion of Ukraine, the bank has done so in a gradual manner every three months. When it cut its main rate to 4% in August, it was largely expected there would be no further reduction at the September meeting.

If the bank were to continue to cut interest rates in the manner it has been doing so, the next meeting in November would see a further reduction. However, economists remain split as to whether another cut is forthcoming since inflation has proven to be stickier than anticipated earlier this year, partly because of relatively high wage increases.

“Several months of disappointing data has highlighted the U.K.’s unwanted position as an international outlier for ‘sticky’ inflation, with the highest headline inflation of any G-7 economy," said James Smith, research director at the Resolution Foundation think tank.