The UK economy remains mired in sticky inflation, it was confirmed today. The August inflation report showed that headline CPI remained at 3.8% YoY last month, the core rate of inflation moderated slightly to 3.6% from 3.8% and the service price inflation fell slightly more than expected to 4.7% from 5%. These are extremely high figures and leave the UK as a global outlier.
Why is UK inflation so high?
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Create account Try a demo Download mobile app Download mobile appWe have the highest rate of inflation in the G10, and compared to the G20, only Turkey, Brazil, Russia and Argentina have higher rates of inflation than the UK. The UK also has a higher inflation rate than South Africa right now. The UK’s inflation rate has been higher than France and Germany’s for every month so far in 2025, so cue the chancellor coming out to say that there is more to do on the cost of living. So, why is the UK such an outlier?
Although the cost of airfares was a downward driver for the CPI reading for August, this only took some of the heat out of the large upward increase in airfares in July. Added to this, there was a rise in petrol prices compared to last year and hotel prices fell by less than they did the year before. The Oasis tour was no doubt partly to blame as people travelled to see the band. Some of the UK’s inflation is down to comparison effects, while the bigger issue is that too many prices are rising, and not enough are falling. Food price inflation is another price increase we literally cannot get away from. There were increases in the price of vegetables, fish and cheese last month.
Price growth and wage increases keep BOE doves at bay
Overall, commodities are playing havoc with our inflation rate right now. While some of this is due to international factors, the fact that high CPI is combined with elevated levels of wage inflation leaves the Bank of England struggling to reach their sole mandate of price stability. There is virtually no chance of a rate cut tomorrow from the BOE, and the market is expecting them to sound concerned about the outlook for prices at Thursday’s meeting since there is less than 2 rate cuts priced in between now and July next year. Thus, the UK is not only an outlier when it comes to inflation rates, but our interest rates are also expected to remain elevated compared to our peers.
The market reaction
The pound has backed away from Tuesday’s highs so far this morning. GBP/USD has slipped below $1.3650, but the decline has been mild so far. The dollar is rising against most of the G10 FX space on Wednesday morning, however, we expect gains to be mild as we wait for the all-important Fed meeting.
The Fed meeting will also loom large over the equity market on Wednesday. Tuesday’s sell off was mostly felt by European indices, the Eurostoxx 50 declined by more than 1%. US stocks also retreated, but the losses were mild. We expect volatility to be low as we drift into the FOMC meeting later this evening. The futures market is pointing to a small decrease in the S&P 500 later today, and a mild increase in the FTSE 100 at the top pf the hour.
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