Customers re-fuel their cars at a petrol station as Brent crude oil prices hit $100 per barrel for the first time since May on July 23, 2026 in London, England.
Leon Neal | Getty Images News | Getty Images
The U.K.’s annual inflation rate jumped to 3.1% in August, pushed up by surging gasoline and diesel prices.
The print, which was in line with economists’ expectations, marked the first inflation reading above 3% since March.
The country’s Office for National Statistics (ONS) said that the spike was largely driven by rising motor fuel costs, which surged 23% year-on-year.
U.K. gas prices hit highest level since 2022
The average price of gasoline rose by 9.1 pence ($0.12) per liter between July and August, the ONS said, putting average prices at their highest since Nov. 2022. Meanwhile, average diesel prices rose by 14.2 pence per liter in August.
Inflation rose to 2.9% in July, as a government-regulated price cap on energy costs was revised sharply upward.
Prices are continuing to rise as crude oil prices hover above $100 a barrel. Earlier this week, British motoring body the RAC said petrol and diesel prices had hit, since the Iran war began, with both fuels now at prices not seen in four years.
The U.K., a net importer of energy, is particularly vulnerable to external energy shocks. The country’s inflation rate rose to 2.9% in July, as a government-regulated price cap on energy costs was revised sharply upward.
In August, the cost of electricity, gas and other household fuels jumped 6% year-on-year, the ONS said Wednesday.
The U.K. is still grappling with a cost-of-living crisis sparked by post-pandemic inflation and surging energy costs that arose in the wake of Russia’s full-scale invasion of Ukraine in 2022.
A person shields themselves from the rain while walking near the Bank of England building on the day the Monetary Policy Committee lowered interest rates, in London, Britain, Dec.18, 2025.
Toby Melville | Reuters
Yields on U.K. government bonds, known as gilts, fell across the curve after Wednesday’s inflation print. The yield on the 30-year gilt — which rose to a 28-year high on Tuesday — was last seen almost 2 basis points lower at 5.907%. The benchmark 10-year gilt yield was nearly 3 basis points lower at 5.365%.
The British pound was flat against both the U.S. dollar and the euro.
The inflation print comes before the Bank of England’s Monetary Policy Committee announces its latest policy update on Thursday. Markets are pricing in more than an 80% chance of the central bank holding its key interest rate steady at 3.75%, according to LSEG data, but are anticipating a hike at its next meeting in November.
Andy Burnham’s balancing act
Rising costs also add to the pressure on new Prime Minister Andy Burnham, who has pledged to tackle the cost-of-living burden but is also tasked with balancing the public books and placating the bond market.
James Smith, developed markets economist at ING, said in a note on Wednesday morning that there was “nothing in the latest UK inflation numbers that screams a need to hike interest rates.”
“The question is whether the energy shock is broadening out to other parts of the inflation basket. And there is very little sign that this is happening,” he said.
Smith pointed to food and non-alcoholic beverages inflation, which slipped to 1.1% year-on-year in August.
“It’s a similar story when we look at goods and services the Office for National Statistics has previously defined as having ‘high’ or ‘very high’ energy intensity,” he said.
“This covers everything from fruit to air fares, to canteens. Even stripping out the distortion from last year’s water and car tax hike, the inflation rate for these energy intensive categories has actually fallen this year. That showed no sign of changing in August.”
Bogdan Toma, a partner at McKinsey & Company, said in an emailed note that gasoline prices at their highest level in nearly four years could signal “an uncertain ‘golden quarter’ for consumers and retailers.”
“With households absorbing back-to-school costs and facing the possibility of higher interest rates, demand heading into the fourth quarter may remain subdued,” he said.
“The ‘golden quarter’ is critical to annual profitability for many non-food, and some grocery retailers. This year, competition for fewer and smaller baskets could be particularly intense, pressuring retailer margins from an already challenged starting point.”
Inflation ‘unlikely’ to make Bank of England hike rates
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said in a note that although the inflation increase was “unlikely to convince the Bank of England to hike interest rates just yet,” it could raise fresh concerns about the outlook for inflation among policymakers.
“The U.S.-Iran conflict began over six months ago but higher energy costs are still filtering through to business input prices and household spending,” he added.
“Core and services inflation were relatively resilient in August, but industry surveys suggest firms are facing renewed cost pressures, particularly in manufacturing and services sectors. Wage growth is muted in the private sector and the U.K. labour market remains soft which could put pressure on consumer spending in the coming months.”
Gardner added that his team is watching closely to see what the potential second and third round effects are from higher costs across the economy.
“Food prices have started to eke upwards after fertilizer costs increased earlier this year but other pressures could emerge if businesses decide to pass their higher costs on,” he said.
“AI is also an important but often overlooked factor at play in the inflation picture as demand for metals, semiconductors and other supply-chain goods grows. For now, it is too early to tell if the energy price spike is evolving into a broader inflation shock but fears will be growing. Much still depends on the duration of the war in the Middle East.”
