UK inflation accelerated to 3.1% in the year to August, its highest level since March, as surging petrol and diesel prices — fuelled by the widening conflict in the Middle East — squeezed household budgets and complicated the Bank of England’s next move on interest rates.
The Office for National Statistics (ONS) confirmed the jump from 2.9% in July on Wednesday, with motor fuel costs rising 23% compared with August last year. Average petrol prices hit 161.3p per litre, up 9.1p in a single month and the highest since November 2022, when Russia’s invasion of Ukraine last sent energy markets into turmoil. Diesel followed a similar trajectory, while airfares jumped during the peak summer getaway period.
Fuel prices transmit global shock to British forecourts
Brent crude, the international benchmark, has surged past $100 a barrel in recent days — up from roughly $73 before hostilities escalated earlier this year. The US-Israel war with Iran has disrupted global oil supplies, and the impact is immediate at the pump.
For independent retailers like Goran Raven, who runs RJ Raven in Essex, the volatility is existential. “Things are down. We’ve got lots of pressure on us at the moment. I’d say we’re about 20% down on this time last year,” he said. “We only have small tanks here, so we need a tanker almost every day at the moment and we have to pay a daily spot price. When the price goes up, we have to go up with it. There’s no way around it.”
The margins, he insists, are wafer-thin. “People like to think we’re earning a lot on it. Unfortunately, we really aren’t. It’s single digits of pence we earn per litre.”
Food inflation holds steady — for now
While energy costs spike, the ONS data offered one sliver of relief: food and non-alcoholic drink inflation remained unchanged at 1.3% in the year to August. Grant Fitzner, chief economist at the ONS, noted that “rising crude oil and petrol prices increased both the annual cost of raw materials and the price of goods leaving factories respectively.”
But economists warn the reprieve may be temporary. Paul Dales, chief UK economist at Capital Economics, was blunt: “Everyone knows that bigger rises in inflation are on their way.” He estimates that higher oil and gas prices, combined with the “first-round effect of businesses passing on some of their higher energy costs,” will push inflation to a peak of 4.2% in January — more than double the Bank of England’s 2% target.
Households caught between rising costs and winter bills
The timing could hardly be worse. From 1 October, the energy price cap will rise 4%, adding roughly £60 a year to a typical dual-fuel bill. A simultaneous cut to VAT on household electricity — from 5% to zero — will save about £45 annually, but Yael Selfin, chief economist at KPMG, said this only partially offsets the impact of wholesale gas prices, which have climbed on the back of the Iran conflict and disruption to liquefied natural gas supplies.
“If gas prices remain around current levels, household energy bills could rise by a further double-digit amount from January, with an even larger increase possible if wholesale prices climb further,” she warned.
For Emma Ashfield, a nursery worker in Northern Ireland raising her eight-year-old daughter alone, the numbers are already overwhelming. “Everything is extremely expensive,” she said. “You are trying to keep food on the table, buy clothes, trying to provide for them. You would basically need a second job. I find electric very pricey… and it is costly trying to heat my apartment too. My wee girl is always wanting the heating on, so that’s another thing.”
Bank of England decision looms as growth slows
The Bank of England’s Monetary Policy Committee meets on Thursday with the base rate at 3.75%. Governor Andrew Bailey and his colleagues now face a familiar dilemma: inflation moving further from target, but an economy losing momentum. UK GDP expanded 0.4% in July, buoyed by artificial intelligence investment, yet second-quarter growth slowed to 0.4% from 0.6% in the first three months of the year.
Prime Minister Andy Burnham acknowledged inflation is “a concern” but insisted the underlying economy is resilient. “The extent to which we’ve got inflationary pressure it’s driven by the situation in the Middle East,” he said on Wednesday. With Chancellor John Healey’s first Budget due on 28 October, Burnham promised “difficult decisions to make sure the economy remains on track.”
The opposition sees an opening. Shadow chancellor Andrew Griffith blamed the government’s “jobs tax and employment red tape” for costs being passed to consumers, while a Conservative spokesperson cited the net zero commitment and “refusal to drill in the North Sea.” Liberal Democrat Treasury spokesperson Daisy Cooper went further, calling it “Trump’s illegal war — egged on by the Conservatives and Reform UK — once again hitting British families hard.”
Why it Matters
The August inflation print confirms that the UK cannot insulate itself from geopolitical shocks in the Middle East. With fuel costs feeding into factory gate prices and winter energy bills set to climb again, the Bank of England may be forced to hold rates higher for longer — or even hike — just as growth momentum fades. For millions of households, the squeeze is no longer abstract: it is the daily calculation of whether to fill the tank, heat the home, or put food on the table. The government’s October Budget will be its first real test of whether it can protect living standards without undermining the credibility of its fiscal rules.
