The Consumer Prices Index (CPI) rose by 3.8% in the 12 months to August 2025, mirroring figures for the previous month of July. It was widely expected that inflation would remain high and the Bank of England predicts that September's figures will reflect higher inflation still.
Food remains a key area of inflationary pressure, having risen every month for the last five months, squeezing household incomes, particularly for those with lower incomes who spend a greater portion of their income on food.
The Director of Insight, British Retail Consortium, said, "food inflation climbed above 5% in August for the first time in 18 months as rising employment costs and poor harvests drove up retailers' costs. With food inflation now outpacing wages, many families will be struggling with the rising cost of living".
Inflation in the UK continues to be the outlier by quite some margin when compared with other European economies. When looking at August's figures, inflation stood at 2.2% in Germany and just 0.9% in France.
What caused August's inflation?
A number of sectors saw prices increase, while others reduced their prices to counter the inflationary effects. A hot and dry summer contributed to poorer food crops in the UK, affecting harvests and the welfare of livestock, which has contributed to food inflation coming in at 5.1% - up from July's figure of 4.9%. Items heavily affected by food inflation included beef, chocolate, butter and coffee. Food costs are expected to continue rising in the coming months due to the impact of monetary policy decisions that have increased business expenses throughout the industry.
Restaurant and hotel costs rose by 3.8% compared to an increase of 3.4% in the year to July. It has been reported that events such as the Oasis reunion tour may have played a part, with higher hotel prices being reported in the cities where it toured. Hospitality also continues to reflect rising costs as a result of increased business taxes and the increase in minimum wages.
Transport was an area that saw a significant reduction in inflation - it came in at 2.4% compared with July's figure of 3.2%. Falls in inflation were also seen in the cost of clothing and footwear, as well as recreation and culture, but the shifts were smaller.
PwC Economist, Nabil Taleb commented that "With little immediate relief seen so far, and uncertainty continuing, household incomes continue to be squeezed which could slow growth at a time when inflation and borrowing costs remain high."
What does August's inflation figure mean for the Bank of England base rate?
While it remains true that the BoE had predicted that inflation would continue to rise for the remainder of 2025, the figures have risen sooner than anticipated and to higher levels. The impact of this sticky inflation is that it makes further base rate cuts this year less likely.
Sandra Horsfield, Economist at Investec said, "The likelihood of a rate cut this week seemed in any case remote; but beyond that too, we judge that it will take evidence of falling inflation to persuade a majority of the Monetary Policy Committee that further rate cuts are appropriate."
The Bank of England voted for a 0.25% cut to the base rate in August, reducing it from 4.25% to 4.00% despite the higher-than-expected inflation figures for July. It is thought that there may be room for one more cut to the base rate before the end of the year if we see the economy improve, but some commentators feel this is unlikely in the current climate.
The rise in inflation means the Bank of England may be more cautious with cutting interest rates from now on. While the 3.8% inflation rate increase is in line with the Bank's predictions, it's still well above its target of 2%.
Latest interest rate predictions suggest that rates will fall to around 3.81% by January 2026. If you're interested in finding out more, check out our article on the latest UK interest rate predictions.
How will this month's inflation figures affect mortgages?
The current high level of inflation makes a cut in the Bank of England's base rate unlikely; in fact, a number of lenders have been steadily raising interest rates over the last week. As a result, homebuyers may have to act now to secure rates in case of further rises.
Based on a loan-to-value ratio of 60%, the best two-year fixed-rate mortgage deals on the market currently come with interest rates as low as 3.78% and the best five-year fixed-rate mortgages offer rates as low as 3.94%. Those looking for the best two-year tracker deal can find rates as low as 4.11%, while the best five-year tracker deal is 4.60%. The best deals can be found in our regularly updated article, "The best mortgage rates in the UK".
If you are unsure about the best type of mortgage for you, consider our article "Remortgaging in 2025", where Damien examines whether now's the right time to fix your mortgage.
How will this month's inflation figures affect savings?
While a cut to the base rate may be attractive to borrowers, savers will be less keen for rates to fall as banks and other providers have already reduced the rate of interest paid on many deposits. Moneyfacts stated that "The average savings rate currently sits at 3.45%, which is lower than inflation, so it is essential that savers shop around to avoid losing money in real terms."
High street banks are paying around 2% interest on average for their easy access savings accounts; this below-inflation interest rate has the potential to eat away at your savings over time. That said, some of the best savings rates on the market are paying an inflation-beating rate. For example, the best easy access savings accounts are currently paying up to 5% while the best 5-year fixed rate bonds are paying up to 4.52%. Take a look at our round-up of the best savings accounts in the UK right now if you're thinking of opening a new savings account.
What to do if you're struggling to pay your bills
Essential household bills are on the rise. Food bills, in particular, are part of the reason for the increase in inflation in August, and many household incomes are struggling to keep pace with inflation. However, there's help available if you're struggling.
If you think you might fall behind on your household bills, the best thing to do is to reach out to the relevant supplier in the first instance. If you explain your situation, there will typically be steps they can take to help you come up with a payment plan that works for both parties.
It's also a good idea to make sure you're claiming all the support you might be entitled to. You can check your eligibility for various benefits through the website entitledto.
We also have several articles that may be more specific to your situation and could offer further help:
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