UK inflation rose from 2.9% in July to 3.1% in August as soaring fuel prices triggered by the Iran war dealt a fresh blow to living standards, official figures showed on Wednesday. Prime Minister Andy Burnham said "difficult decisions" would need to be taken in next month's budget after the rise in energy prices pushed inflation above 3% amid worsening damage to the global economy from the Middle East conflict. With the war's fallout rattling global financial markets, the prime minister signalled the 28 October budget would take investor fears over the hit to the public finances into account. "We will take difficult decisions to make sure the economy remains on track," Burnham said. "It is going to be challenging, because the picture around the world is challenging, particularly the situation in the Middle East, and we will look carefully at all those things." "We won't take risks with people's living standards or with the economy as a whole, so we will take it all into account," he added. ## Haldane Attack Rejected by Downing Street The prime minister also downplayed criticism from Andy Haldane, who has urged him not to raise taxes. The former Bank of England chief economist, who advised Burnham before he entered Downing Street, told LBC on Tuesday: "The market now suspects that this is a traditional tax-and-spend socialist government with better TikTok videos." Burnham rejected the characterisation, saying: "We are not that already ... It's not the case that we aren't going to take difficult decisions." In a critical week for the economy, the Bank of England is preparing its interest rate decision on Thursday against the backdrop of rising inflationary pressure from soaring oil and gas prices. With headline inflation drifting further from the 2% target, financial markets predict a one-in-five chance of a quarter-point rise from the current level of 3.75%, and the City expects at least four increases to 4.75% next year. ## Petrol at Highest Level Since November 2022 Economists said there were signs underlying inflation remained in check amid a cooling jobs market. Services inflation, closely monitored by the Bank, held unchanged at 3.4%, while core inflation, which excludes volatile energy and food items, also held steady at 2.6%. Official figures on Tuesday showed a slowdown in wage growth and a rise in unemployment, which the Bank has previously said could help limit the risk of entrenched inflation. The latest snapshot from the Office for National Statistics showed the August increase was driven by a 23% jump in motor fuel prices. Average petrol rose 9.1p between July and August to 161.3p a litre, the highest level since November 2022, while diesel climbed 14.2p to 181.8p a litre. Air fares rose 6.2% between July and August, particularly on long-haul routes, and rising crude costs also pushed up raw material prices and the price of goods leaving factories. As fighting across the Middle East intensifies, global oil has soared to more than $106 a barrel. The energy shock pushed the European Central Bank to raise rates last week, and financial markets expected the US Federal Reserve to raise borrowing costs on Wednesday for the first time since 2023. Bond markets have been thrown into a tailspin, with the yield on US government bonds breaching 5% for the first time since 2023 and long-term UK borrowing costs reaching the highest levels in decades. ## Pressure Mounts on Bank and Chancellor Susannah Streeter, chief investment strategist at Wealth Club, said: "Given this ramp-up in consumer prices, the pressure on the Bank of England to raise rates is mounting, although a hold at 3.75% is still expected tomorrow." "It feels like Groundhog Day, with consumers once again feeling the pinch due to geopolitical events far beyond their control," she added. Richard Carter, head of fixed interest research at Quilter Cheviot, said: "Today's figures are a kick in the teeth for an administration that wants to make easing the cost of living its central mission." "The budget is quickly coming into focus and with borrowing costs continuing to climb for the UK, measures are going to be limited and thus growth will remain challenged," Carter said. The renewed squeeze will intensify calls on Chancellor John Healey to use the 28 October budget to give breathing space to households reeling from years of soaring prices for energy, food and everyday items. Economists warn that as the Middle East fallout intensifies, UK inflation could continue climbing closer to 4%, heaping further pressure on both the government and the Bank to act. The Bank now faces a dual test at Thursday's decision: inflation drifting away from its target while the jobs market cools, a combination that leaves policymakers weighing a defence of their inflation credibility against the risk of squeezing an already weakening economy, with the City's expectation of four further hikes next year underlining how far borrowing costs are projected to rise.