Consumer Prices Index Inflation Holds at 3.8% pa but RPI Falls

The Office for National Statistics (ONS) has this morning released UK inflation figures for August 2025.

After last increase from 3.6% to 3.8% which ‘set the cat amongst the pigeons’ with bets that Bank of England interest rates would be held at the next Bank of England Monetary Policy Committee due tomorrow.  In the USA, the Federal Reserve is due to announce US interest rates later today as we are guessing that the Bank of England will follow suit.

The flatlining of inflation was a surprise to consumers who have seen price rises as businesses increase prices to combat the huge employer national insurance contribution increases and minimum wage increases for employees below age 21, getting minimum wage increases in a year of between 16% and 18% and over 2 years, staggering increases of nearly 43%.  Even for over 21s, minimum wages have increased by over 33% in 2 years. These increases started in April, so we suggest the impact will be sustained for a period.

This ‘hold’ offers some glimmer of hope for our embattled Chancellor, as prices are still high, but the economy is slowing down, cutting tax revenue, so the Chancellor does need to stimulate the economy. 

On a happier note, the old measure of inflation, Retail Prices Index (RPI) did fall from 4.8% pa (July) to 4.6% pa (August).

Falls in Prices (largest falls 1^st)

Transport, Recreation and culture, Clothing and footwear.

Rises in Prices (largest rises 1^st)

Restaurants and hotels, Food and non-alcoholic beverages, Alcohol and tobacco, Furniture and household goods, Miscellaneous goods and services.

No Change in Prices

Housing and household services, Health, Communication.

RPI Falls 0.2% pa to 4.6% pa

The old measure of inflation RPI, an arithmetical mean of the average prices of a basket of household spending (rather than the geometric mean for CPI) and still our preferred measure of real inflation and is still at late 2023/early 2024 figures.  This has fallen but it still higher than it was in July, so not much joy here for the Bank of England or the Chancellor.

Comment

The Bank of England now has a dilemma.  The economy is slowing down; unemployment is up but prices are still rising in key sectors such as food.  The next interest rate decision by the Bank of England is going to be a gamble either way.  The economy needs a rate cut but prices are rising.  The Bank of England cut interest rates earlier than we expected in August, so it will be close for its decision tomorrow.  We suggest they may hold at 4.0% pa even if the Federal Reserve's decision later today is to cut rates by 0.25% to a range of 4.0% to 4.25% pa to maintain parity and therefore stable currency exchange rates given the $150bn+ worth of announcements of AI/Tech investment in the UK by US firms today.

Key dates for us all:

• Next Bank of England MPC interest rate decision is tomorrow, 17 September 2025.
• Next ONS inflation report 22 October 2025.