Inflation is above the Bank of England’s 2 per cent target yet again, figures show today, in a fresh blow for UK households.
UK inflation stood at 3.8 per cent in the year to August, and is expected to rise when the September figure is released next month.
The Consumer Prices Index (CPI) was last below the Bank’s target level in September 2024, when it stood at 1.7 per cent.
Rising food prices were the biggest contributor – increasing by 5.1 per cent annually. Beef, butter, milk and chocolate prices have surged, with the cost of living still affecting millions of households.
When Labour won power last July, inflation stood at exactly 2 per cent – so how much can the current administration be blamed for the high rate of price rises?
The i Paper speaks to experts to try and understand why the UK’s figure is so high, and whether it could get worse in the future.
Compared to most countries in the G20 – a grouping of important industrialised and developing economies across the world, the UK’s CPI inflation rate of 3.8 per cent is high.
For comparison, in the Euro area, inflation stands at 2.1 per cent, and in the US, it is 2.9 per cent.
However, several other countries are seeing much higher figures. including Turkey and Argentina.
The blame for some of this has been partly laid at the door of Sir Keir Starmer’s Government.
Last year at the Autumn Budget, Chancellor Rachel Reeves introduced a series of tax rises and policies that economists argue have pushed up prices.
An example of this was the increase in employer national insurance (NI), which added extra costs to businesses, and led to some passing at least some of this on to consumers.
James Smith, research director of the Resolution Foundation, said: “There are many drivers of Britain’s high inflation, some of which lies at the Government’s door. The employer NI rise in April pushed up business costs – especially in low-paying sectors like retail and hospitality – which has in turn driven up prices.”
Services inflation, which measures the general increase in prices for services rather than physical goods, is stuck at 4.7 per cent in the latest figures.
Raj Badiani, economics director at S&P Global Market Intelligence, added: “The rise in the minimum wage and employer national insurance contributions from April 2025 has created significant challenges for labour-intensive services.
“Despite soft demand for consumer-facing services, inflation rates in recreational and cultural, catering, and personal care services remain markedly elevated in August.”
Food inflation is also rising, and economists believe this is partly down to Labour policies. It currently stands at 5.1 per cent, up from 4.9 per cent in July.
“Higher labour costs for major food retailers have contributed to accelerating food price inflation during the summer months,” says Badiani.
Thomas Pugh, economist at accountancy firm RSM UK, estimates that at least one percentage point of UK inflation is down to Government policies, though he points out that energy prices have played a big part too.
A price cap set by energy regulator Ofgem sits at £1,720 per year for an average household.
A year ago, it stood at £1,568, and a year before that it stood at £2,074 – after Russia’s invasion of Ukraine.
Inflation compares current prices to 12 months previously. That means that last July, inflation was lower because energy prices had been falling, which dragged down the overall CPI figure.
Labour is due to hold its next Budget in November, and is expected to raise taxes again.
Reeves is under huge pressure to deliver a successful Budget following a series of scandals that have damaged Starmer’s Government, including the sacking of UK ambassador to the US Peter Mandelson over his association with Jeffrey Epstein, and the resignation of deputy prime minister Angela Rayner over her tax affairs.
Experts say that there is a chance that many of the measures in the Budget do not add to inflation, although there is still a risk.
“We suspect the measures in the Autumn Budget 2025 will not be directly inflationary, given they are likely to focus on inheritance, property and other wealth taxes — and the possible extension to the current freeze on income tax thresholds by two years to 2030,” explains Badiani.
Certain policies could push the CPI number up.
Pugh says: “The most likely thing would be the reversal of the 5p fuel duty cut and increasing it by RPI [another measure of inflation], which would add a little over 0.1 per cent to inflation.
“Broadening the VAT base would also raise inflation even if the headline rate remains unchanged.”
In terms of cutting inflation, he says any reductions in fuel duty or VAT could reduce the overall figure, with reports suggesting Labour is considering lowering VAT for energy bills.
“In the medium term, increases in income tax will dampen demand and lead to lower inflation,” Pugh adds.
There are also some factors that are beyond Government control.
“If the Organisation of the Petroleum Exporting Countries (Opec) follows through with huge oil production increases and tensions in the Middle East calm, oil prices could fall sharply by the end of the year,” explains Pugh.
Lower oil prices would feed through to lower production and energy costs, potentially cutting inflation.
