UK inflation held firm at 3.8% in August, remaining at almost double the Bank of England’s 2% target. Inflationary pressures persist, driven by a tight labour market and resultant rising wages, as well as transport and fuel costs, rising airfares, and high costs in the services sector.

The UK remains at the top of the G7 inflation league table, roughly a percentage point above the US and nearly double the Eurozone rate — inflation in the UK appears to be taking a different trajectory, largely due to greater exposure from energy price shocks, the rise in employers’ National Insurance contributions, weak productivity, and labour shortages.

The Bank of England predicts that inflation will reach a peak of 4% by September, before a gradual decline later in the year and into 2026.

Today’s figures are not good viewing for those hoping for a cut to interest rates when the Monetary Policy Committee (MPC) meet tomorrow. With wage growth and services inflation running hot, the MPC is very likely to keep rates on hold.

However, given the economy is growing slower than desired, we expect at least one more interest rate cut before the end of the year — as long as inflation doesn’t escalate much further.

This sets the stage for the Autumn Budget. Persistent inflation is keeping gilt yields elevated, which means higher debt-interest costs for the Treasury (projected at over £110 billion in 2025-26) and even slimmer fiscal headroom for the Chancellor.

As a result, we can expect a budget largely focused on supply-side measures — including targeted investment incentives, infrastructure spending, and policies to expand the workforce — rather than broad demand stimulus that could keep inflation high.

The Chancellor’s position is certainly not enviable, but not as bad as many commentators suggest. Comparisons to the 1970s are, once again, overblown — the UK faces a mild stagflation risk, but we remain a long way from the double-digit inflation spikes and deep recessions of the 1970s.

Today’s picture is more controlled: inflation is much lower, wage-price spirals are contained, global energy markets are better diversified, and the Bank of England has an independent mandate to anchor expectations. The Chancellor will be looking to use these factors to her advantage as she looks to turn the economy around.

Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.