The Bank of England is expected to keep interest rates at 3.75%, but economists warn that pressure to raise them is building as inflation rises.
Most economists think the Monetary Policy Committee (MPC) will leave rates unchanged at its meeting on Thursday. That would be the sixth consecutive hold, with rates steady since December.
Policymakers are likely to stick with a "wait-and-see" approach, particularly regarding the Middle East conflict and its impact on the UK economy. However, three MPC members, Huw Pill, Megan Greene and Catherine Mann, voted to hike rates to 4% at the last meeting, and economists expect the same split this time.
The decision comes as UK inflation picked up. Consumer Prices Index (CPI) inflation rose to 3.1% in August, up from 2.9% in July, according to official figures. That is a five-month high and moves inflation further from the Bank's 2% target.
Many economists expect the cost of living to keep rising, with households facing higher energy bills from next month. That could prompt the Bank to increase rates in the coming months.
Experts note that services inflation, which reflects prices in the UK's dominant services industry, stayed at 3.4% in August, suggesting limited "second round effects" such as wage demands and broader shop price increases. But inflation is likely to be pushed up when Ofgem's next energy price cap takes effect in October, raising typical dual-fuel household bills by 4%.
Thomas Pugh, chief economist at RSM UK, said: "The rise in inflation in August is just the start of a new upward trend as higher energy, food and memory chip prices continue to make their way through supply chains. We now see inflation peaking at almost 4% in early 2027, before gradually dropping back to 2% in 2028. The MPC will hold this week, but inflation at 4% is realistically too hot to ignore."
Charlotte O'Leary, associate economist for the National Institute of Economic and Social Research (Niesr), said the MPC will also watch the recent surge in oil prices, with Brent crude rising above 107 dollars a barrel this week. "Nevertheless, with limited evidence of second-round effects so far, we expect the MPC to hold rates on Thursday," she said. "However, mounting inflationary pressures, alongside resilient growth data, may eventually grant scope to raise rates without materially damaging the economy."
Economists for Pantheon Economics said there is a chance the MPC "toughens its language" at the next rates announcements "to open up the possibility of a November hike if energy prices keep ramping up". They added: "A 4% inflation peak would already be too hot to hold, but further energy price rises could take inflation even higher. The MPC needs to be ready."
Last week, the European Central Bank raised its interest rates for the second time this year, warning that the Iran war continues to generate inflationary pressure.
