London's Economy Today editorial - September 2026

UK inflation rises again in August

The latest Consumer Price Index (CPI) inflation data from the Office for National statistics (ONS) showed that CPI inflation rose to 3.1% in the 12 months to August 2026, up from 2.9% in July (Figure 1). CPIH inflation, which includes owner occupiers' housing costs, also increased, from 3.1% to 3.3%. On a monthly basis, both CPI and CPIH rose by 0.5% in August, compared with increases of 0.3% in August 2025.

Transport made the largest upward contribution to the change in annual inflation, driven mainly by motor fuels. Petrol prices rose by 9.1 pence per litre between July and August, while diesel prices increased by 14.2 pence. Overall, motor fuel prices were 23.0% higher than a year earlier. Smaller upward contributions came from housing and household services, including domestic energy costs.

Underlying measures were more stable. Core CPI remained at 2.6%, services inflation was unchanged at 3.4%, and goods inflation increased from 2.2% to 2.7%. Food and non-alcoholic beverages inflation was unchanged at 1.3%, its lowest rate since September 2021 apart from the same rate seen in July.

The August data suggest that the renewed rise in headline inflation is being driven primarily by energy and fuel prices rather than a broad-based acceleration in domestic inflation. However, continued volatility in oil and gas markets creates a risk that higher energy costs could feed into a wider range of goods and services over the coming quarters.

Energy bills will rise again from October, but a VAT cut and winter support will cushion the rise

Looking ahead Ofgem has confirmed that its energy price cap will rise by 4% to £1,723 a year for a typical dual-fuel household from October, £60 more than over the summer. The cap sets a benchmark for a typical household rather than a maximum bill, and the roughly one in three households on fixed tariffs are unaffected. Almost all of the increase is due to gas prices, where higher wholesale costs lifted bills by around 8%; electricity costs remain broadly flat.

Two things should cushion the rise. The £1,723 already reflects the new zero rate of VAT on domestic electricity, in place from October to March, without which the cap would be about £45 a year higher. Alongside it, the Warm Home Discount, a £150 credit on electricity bills, reopens in October, while Winter Fuel Payments of £100 to £300 reach some older households. Gas bills, though, will still carry 5% VAT.

For London, the picture is mixed. The capital’s fuel-poverty rate, at 9.6% in 2024, sits below the England average of around 11% - but London was the only English region where fuel poverty rose that year, and October’s higher cap adds to the pressure on lower-income households as winter approaches.

Bank of England holds rates while global monetary policy tightens

Against the background of rising headline inflation, the Bank of England's Monetary Policy Committee (MPC) voted by a majority of 6–3 at its September meeting to maintain the Bank Rate at 3.75%, with three members preferring an immediate increase to 4.0%. The Committee expects CPI inflation to rise further in the coming months, with higher energy prices associated with the prolonged conflict in the Middle East its principal concern. However, the majority saw little evidence of material second-round effects, as higher energy costs had not yet fed significantly into wider prices or wages. A relatively soft labour market and higher borrowing costs were also expected to restrain inflation.

The three members supporting an immediate increase were concerned that the effects had been delayed rather than avoided, particularly as the projected inflation peak would coincide with the 2027 wage-setting period. Overall, the MPC decided to wait for clearer evidence of broader inflationary pressures but remained ready to raise rates if necessary.

Internationally, the US Federal Reserve raised its target range by 0.25 percentage points to 3.75%–4.00%, with 16 of its 18 policymakers expecting at least one further increase before the end of 2026. The European Central Bank also raised its policy rates by 0.25 percentage points, while the Bank of Japan increased its policy rate from 1.0% to 1.25%.

Gilt yields fall back after the Bank overhauls its bond sales

The MPC's decision was accompanied by a significant change to the unwinding of the Bank’s bond holdings, against the backdrop of a sharp rise in long-dated borrowing costs earlier in the month. The 30-year gilt yield reached around 5.9% in early September, the highest since the Debt Management Office (DMO) was established in 1998, and the DMO's £4.25bn syndicated sale of 30-year gilts on 8 September was priced to yield 5.82%, also the highest at issuance on a comparable basis, despite attracting orders of more than £85bn. The rise reflected a combination of energy-driven inflation expectations, uncertainty, and reduced structural demand for long-dated gilts from pension funds following changes to liability-driven investment strategies since 2022.

At its September meeting, the MPC set out a multi-year path to reduce the Bank’s gilt holdings held for monetary policy purposes to zero. The plan involves annual gilt sales of £20bn alongside maturing gilts, resulting in an average annual reduction in the stock of around £46bn through to 2034, compared with a £70bn reduction over the previous year. The Bank will also retain £120bn of its longest-dated gilts to back current and future banknote issuance, while its existing gilt auctions will pause pending a review of the future sales mechanism before April 2027. Gilt yields fell following the announcement, with the 30-year yield declining by around 12 basis points to 5.74%, while yields also fell at shorter maturities.

These movements formed part of a wider repricing of long-dated government debt. Eurozone yields reached 15-year highs at the start of September, the 30-year Japanese government bond yield approached its highest level since that maturity was introduced in 1999, and the 10-year US Treasury yield briefly exceeded 5% before easing to 4.94%. These markets have been affected by some common pressures, including higher inflation risk premia, increased government debt issuance and changes in demand from traditional long-term investors.

UK economy continues to expand in July led by services

Despite this economic uncertainty the economy continues to grow. The latest data from the ONS showed that UK economy grew by 0.4% in the three months to July 2026. This was unchanged from growth in the three months to June and marked the eighth consecutive three-month period in which the economy expanded (Figure 2).

In the three months to July, services output grew by 0.6% and made the main contribution to overall GDP growth. Services contributed 0.48 percentage points (pp) to the 0.4% increase in GDP. By contrast, production and construction output each fell by 0.5%, subtracting 0.06pp and 0.03pp respectively from overall growth. Within services, the strongest growth came from information and communication (2.5%), professional, scientific and technical activities (2.1%), and administrative and support services (1.3%). Compared with the same period a year earlier, real GDP was 1.3% higher.

On a monthly basis, GDP increased by 0.4% in July, following growth of 0.3% in June and no growth in May. This growth rate was higher than the 0% growth expected by polled analysts. All three main sectors expanded in the month of July: services output grew by 0.4%, production by 0.2% and construction by 0.1%. GDP in July was 1.6% above its level a year earlier.

The UK’s services surplus widened again over the summer, but the goods deficit kept total trade in the red

The ONS recently published data that showed in the three months to July 2026, the UK’s total trade deficit in goods and services narrowed by £1.1 billion to £9.0 billion, compared with the previous three months. Within this balance, the goods deficit (excluding precious metals) narrowed by £0.4 billion to £61.6 billion, while the services surplus widened by £0.7 billion to £52.6 billion.

According to business sentiment surveys on UK services trade, there was a general improvement in market conditions and increased volumes of new work over July 2026. However, business uncertainty linked to the Middle East conflict was cited as an ongoing challenge, while more export growth was reported with Europe, compared with other markets.

Britain’s services exports are, to a large degree, a London story. On the latest regional figures, for 2023, London accounted for £213 billion of service exports (around 45% of the UK total), more than any other region - led by financial and insurance services (£66 billion) and information and communication (£62 billion).  

This regional data extends only to 2023, so London’s part in the latest data cannot yet be measured; but, as by far the UK’s largest services exporter, the capital remains central to how the UK’s external position performs.

ONS set to adjust the UK’s productivity measurement in November, with regional data to follow in 2027

The ONS has set out a new “component” approach to measuring labour productivity (output per worker or per hour worked). First estimates are due in November, with individual industries to follow in February 2027. The methodology leaves output (the numerator) unchanged and revises only the labour input. For output per worker, jobs will be built up from Workforce Jobs data rather than the Labour Force Survey (LFS) total. For output per hour, hours will be anchored to employer-reported ASHE data rather than self-reported LFS hours, which the ONS assess as biased upwards (due to under-recorded leave).

On the ONS’s indicative estimates (not yet official statistics) the change lifts the long-run productivity picture. Output per hour was 40.7% higher in 2024 than in 1997 on the new methodology, against 34% on the current one – or 1.3% a year rather than 1.1% if expressed as average annual growth rates. Much of the improvement arrives after the financial crisis: over 2009 to 2019, output per hour growth is estimated at 1.3% a year on the new basis against 0.7%, which the ONS estimates can explain about half of the previously estimated post-crisis slowdown. Per job and per worker measures of productivity change far less. Since 2019, the new method actually lowers productivity growth: output per worker sits about 1.9% above its 2019 level rather than the 2.4% previously estimated.

Until London moves onto the new methodology in 2027, London and UK productivity measures will use different labour-input measures and will not be directly comparable. The eventual change, however, should lift London’s measured productivity in a similar way. Combined with recently released data on London’s nominal output (which points to better-than-predicted growth in 2024 and 2025) – the productivity picture for London looks better than previously worried over.

London’s labour market remains weak

The latest labour market data from the ONS suggests that labour market conditions in London are weak. The data showed in the three months to July that London’s employment rate declined, while unemployment and economic inactivity increased. Taken together, these movements point to a cooling labour market, with fewer people in work on this measure and increases in those actively seeking work and those outside the labour force. Over the same period, unemployment and inactivity have remained stable in the UK. However, the ONS urges caution when interpreting short-term movements, given the data volatility issue in the Labour Force Survey.

Thus, in more detail, the employment rate in London was estimated at 73.9% for the three months ending July 2026, a decrease of 1.4pp on the same period in the previous year, and a decrease on the quarter. London’s employment rate was lower than the UK average (75.1%). London’s unemployment rate was estimated at 6.8%, an increase on the quarter and an increase of 0.7pp from a year earlier. And London’s inactivity rate (the measure of those not looking and/or not available to work) was estimated at 20.5%. This was an increase of 0.9pp on the previous year, and an increase on the quarter. It is lower than the UK-wide estimate of 20.9%. The more timely estimate of payrolled employees showed a decrease of 7,860 (-0.2pp) in the number of payrolled employees in London between July 2026 and August 2026, and a decrease of 1.0% on the year (subject to revision).

GLA Economics will continue to monitor these (and other) aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.