Written by Rob Morgan, Chief Investment Analyst at Charles Stanley
UK inflation remains stubbornly high, with August’s Consumer Prices Index (CPI) holding steady at 3.8%, in line with expectations.
While price rises are expected to ease in 2026, households continue to feel the squeeze, caught between elevated living costs and a cooling jobs market. With food prices up 5.1% year on year and housing costs up 7.4% the price of essentials has been escalating rapidly, making it very hard for people to escape the unwelcome resurgence.
For the Bank of England, sticky inflation presents a policy dilemma. It’s now clear the UK has a unique inflationary problem compared with other developed nations, partly thanks to high energy costs, and some Monetary Policy Committee (MPC) members remain concerned about second-round effects. This is where prolonged inflation above the 2% target risks embedding higher price expectations into consumer behaviour and business decisions, creating a self-fulfilling feedback loop.
Will the BoE cut rates again this year?
The inflation outlook has triggered a tug-of-war within Threadneedle Street. Some MPC members argue that signs of weakening demand and softening price pressures justify another rate cut before year-end — continuing the Bank’s “gradual and careful” easing cycle.
However, the persistence of elevated inflation complicates that narrative. With the September CPI print likely to remain well above target – potentially double – a majority of the committee may opt to hold rates steady at the November meeting. Meanwhile, GDP growth, though tepid at 1.4% year-on-year, hasn’t slowed enough to confirm a decisive disinflationary trend.
Some policymakers may also prefer to wait for greater clarity on the fiscal outlook from the upcoming Budget before committing to further easing. This implies no reduction until December at the earliest.
What will drive the inflation trajectory now?
The path of inflation now hinges a lot on services. While food, energy, and core goods inflation are probably reaching their peak, services could remain resilient as employment costs remain high, keeping overall CPI elevated even if other components stabilise. With wage growth still strong, inflationary pressures may continue to bubble to the surface and delay interest rate cuts until next year.
