In August, shop prices in the UK rose the most in 17 months, primarily due to higher food costs. The British Retail Consortium reported a 0.9% increase overall, with food prices soaring by 4.2%. This is the biggest jump since February 2024. Key items like butter, eggs, and chocolate became more expensive because of strong demand, higher labor costs, and poor harvests. The Bank of England is worried that rising food prices might lead to increased inflation expectations, which could push up wage demands. In July, the UK’s Consumer Price Index hit 3.8%, its highest in 18 months. It is expected to rise to 4% in September before it possibly falls again.

UK BRC Shop Price Index

In August 2025, the latest UK BRC Shop Price Index showed a 0.9% Year-over-Year increase. This was slightly below the expected 1.0%, but higher than the previous month’s 0.7% rise. The new shop price data indicates that inflation is lasting longer than many predicted, especially with food prices driving the increase. This puts pressure on the Bank of England to keep a strict approach to control inflation expectations. We think the market may not be fully considering another interest rate hike by the end of the year, a possibility that seemed unlikely just a month ago. Interest rate derivative markets will likely feel the most immediate effects from this news. SONIA futures for the coming months are expected to see increased selling pressure as traders adjust for a higher terminal rate. A similar situation occurred in late 2022 when persistent inflation made markets rethink the Bank of England’s strategy, leading to substantial changes in the short-term yield curve.

Investment Strategy Outlook

This situation could continue to support the British pound, especially against currencies from central banks with softer policies. Recent US data indicates a slight cooling in their labor market, giving the Federal Reserve more flexibility to pause, which boosts the case for GBP/USD growth. We believe it’s a good idea to buy call options on Sterling to take advantage of this potential difference in central bank policies over the next month or two. However, the outlook for UK equities may be tougher, as ongoing higher interest rates could negatively affect company valuations. We expect more volatility in the domestically-focused FTSE 250 index, which feels more impact from UK consumer health and borrowing costs compared to the globally-focused FTSE 100. Derivative traders might consider buying put options on UK mid-cap indices as protection against a possible economic slowdown. Create your live VT Markets account and start trading now.

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