UK inflation held at 3.8% in August, underlining the Bank of England’s policy dilemma. While some MPC members argue weakening demand warrants further cuts, others fear that resilient wage growth and sticky services inflation risk embedding higher price expectations. With CPI still well above target, advisers and clients alike face continued uncertainty over the timing of rate moves – and how long elevated living costs will persist.
Industry experts and professionals have shared their thoughts to the latest data.
Luke Bartholomew, Deputy Chief Economist, at Aberdeen said:
“Despite being well ahead of the inflation target, the Bank of England will take some comfort in the fact that inflation came in largely as expected and because underlying inflation pressures look to be very slowly fading. However, food price growth remain elevated, which policymakers are concerned could cause wider inflation expectations to bleed higher.
“Inflation is likely to move a little higher in the near term, peaking around 4%. With that backdrop, there is little doubt that the Bank will keep interest rates on hold tomorrow. Perhaps more interesting is what the Bank decides on its quantitative tightening (QT) policy, which is likely to involve scaling back the pace of QT to around £70 billion, which might provide some modest support to the gilt market.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said:
“August inflation data highlights the sustained nature of UK price pressure, with CPI remaining at 3.8%. Food costs look to have been a driver along with restaurant and hotel costs.
“These figures come in the context of a finely balanced Bank of England MPC decision to cut interest rates in August. This only squeaked through after a second round of voting – and with inflation climbing higher, a further cut when they meet again this week looks very unlikely. For borrowers, this could mean costs stay elevated for longer, particularly for mortgage holders and those with other forms of debt. Savers, meanwhile, may still find some best-buy easy-access accounts offering inflation-beating rates, though real gains remain slim once rising prices are considered. For those able to accept some investment risk, options like a stocks and shares ISA or, looking longer-term, a pension could offer better prospects of growth above inflation.
Inflation and the triple lock
“Next month’s inflation release will be particularly significant as it sets the inflation element of the State Pension triple lock. However, with average earnings growth currently sitting at 4.7%, it looks likely this will be the figure that determines next year’s rise. If so, that would mean a full new state pension increase of around £562 to £12,534.60 for the tax year 2026-2027.
“Today’s UK inflation print of 3.8% for the month of August is the penultimate reading before the September reading (published next month) that is one of three potential factors for the Triple Lock State Pension increase. While the 2.5% floor will not be required this year, yesterday’s data showed that annual growth in employees’ average earnings increased to 4.7% for total earnings including bonuses which means it is likely to set the uprating for 2026/27, pending any revisions to that figure.
“This is set to deliver around a £563 rise in the State Pension next year, taking it to £12,536 for 2026/27, just shy of the Personal Allowance which is currently set at £12,570.”
David Brooks, Head of Policy at leading independent financial services consultancy Broadstone, said:
“Although inflation remains stubbornly high in the UK, it looks likely that the average earnings figure will this year trigger another substantial triple-lock increase next April, taking the full new State Pension right to the brink of the Personal Allowance.
“The good news for millions of pensioners is that they will receive an above-inflation hike to their State Pension at a time when the cost of living continues to squeeze retirement incomes. For those that rely heavily on the State Pension to provide the majority of their income, the extra +£560 a year will be a welcome financial boost especially alongside the widening of Winter Fuel Payment eligibility.”
Sarah Pennells, Consumer Finance Expert, Royal London, said:
“Inflation has held at 3.8% which will be disappointing news for households already grappling with high costs across the board.
“With winter fast approaching and uncertainty around what the Chancellor may announce in the Autumn Budget, it’s understandable that many people are feeling increasingly anxious about their financial stability.
“Many people feel that their money isn’t stretching as far as they need, and it’s difficult to cover the costs at the checkout and monthly bills. Our Financial Resilience Report shows that most people are still seeing their food and energy bills rise, and 2% of adults remain in financial crisis, unable to pay essential bills.
“In the face of this uncertainty, it’s more important than ever for households to take proactive steps: review household budgets, shop around for competitive savings accounts, and check whether you qualify for any state benefits, or financial support from providers for example, your energy provider, if you can’t pay your bills.”
Lindsay James, investment strategist at Quilter, said:
“UK inflation held steady at 3.8% in August, the same as July. Core inflation registered 3.6%, while services inflation slowed to 4.7%, compared with 5.0% in July, highlighting the persistence of domestic price pressures. Food inflation eased modestly to 5.1%, having been 4.9% last month, but grocery prices remain elevated, echoing recent data showing only a gradual slowdown.
“This outcome broadly confirms forecasts that inflation would hover around 4% through the autumn, with expectations for a slow descent beyond that, potentially not hitting 2% until 2027. With regular wage growth running at 4.8%, the risk is that services inflation continues to prove stubborn, making the Bank of England wary of cutting rates prematurely. While pay growth has slowed a touch from earlier in the year, it remains strong enough to fuel inflationary pressures, and real pay gains are still only marginal.
“For the wider economy, today’s figures underline the higher-for-longer interest rate environment. That will keep pressure on households already contending with elevated living costs and on businesses facing squeezed demand. Growth risks remain tilted to the downside in the second half of the year, and the labour market could soften further if wage pressures collide with slower activity.
“For government, stubborn inflation complicates the fiscal outlook. Elevated benefits indexation and higher debt interest payments from the UK’s large stock of index-linked gilts mean the Chancellor will have even less room for manoeuvre when she delivers the budget at the end of November. That reality will shape how Labour balances fiscal credibility with its policy ambitions. For investors, the key takeaway is not a resurgence of runaway inflation, but a plateau that delays relief and keeps yields and borrowing costs elevated for longer.”
Danni Hewson, Head of Financial Analysis at AJ Bell, said:
“There are no surprises in this latest set of inflation figures, just a growing pain in the purse – especially when it comes to the supermarket checkout. For households, the unwelcome increase in food prices for the fifth month in a row leaves little wiggle room. Whilst we are nowhere near those double digit increases that peaked in early 2023, consumers are becoming increasingly concerned.
“They’ve already traded down to generic brands and changed buying habits, and despite inflation-busting pay increases for many, few people feel they’re better off today than they were a couple of years ago. Businesses from food producers to supermarkets and restaurants have warned that they would need to pass on rising labour costs to their end consumer and this latest set of figures suggests that’s exactly what is happening.
“There was some good news in the latest data. Airfares, which played such a huge part in pushing up headline inflation in July’s data, have fallen back, thanks primarily to the timing of school holidays. But the price at the pump has risen and the cost of goods has edged up as well.
“For the Bank of England there is a silver lining to be found in both the core inflation number and service inflation, which have both fallen, but markets are under no illusion. At 3.8% inflation is way above the Bank’s target and prices are expected to keep rising in the near term.
“Looking further down the track, markets are hedging their bets on the potential for one final interest rate cut in 2025 as labour market weakness begins to impact remuneration decisions.”
Claire Jones, savings expert at Flagstone, said:
“The chances of another base rate drop before year-end are looking slim while inflation remains this sticky. Fixed-term savings accounts are a saver’s best defence against stubborn inflation. Savers would be wise to lock in inflation-beating returns for the longest terms they can manage, allowing them to ride out this tricky climate safe in the knowledge that their money is losing as little in real terms as possible. Inflation-busting rates aren’t hard to find; with CPI currently standing at 3.8%, there are 92 retail GBP accounts offering higher than 3.8% available on Flagstone right now.”
