UK inflation rose to 3.1 per cent in August as higher fuel prices pushed the rate further above the Bank of England's target, increasing the challenge facing policymakers ahead of their latest interest rate decision.

The consumer prices index increased from 2.9 per cent in July, according to the Office for National Statistics, while prices rose 0.5 per cent on a monthly basis. Transport, particularly motor fuels, made the largest contribution to the increase in the annual inflation rate.

Underlying measures were more stable. Core CPI, which excludes energy, food, alcohol and tobacco, remained at 2.6 per cent, while services inflation was unchanged at 3.4 per cent. Goods inflation increased from 2.2 per cent to 2.7 per cent.

The figures leave the Bank balancing renewed energy-driven inflation against signs of weaker domestic price and wage pressures.

The Monetary Policy Committee will announce its latest decision on Thursday. Bank Rate currently stands at 3.75 per cent after the MPC voted six to three to leave borrowing costs unchanged in July, with three members preferring an increase to 4 per cent.

The Bank has already warned that energy prices remain volatile because of conflict in the Middle East and that prolonged increases could feed into wider wage and price-setting. However, it said in July that there was little evidence of such second-round effects and pointed to continued underlying disinflation.

Stuart Morrison, research manager at the British Chambers of Commerce, said the latest figures confirmed "the worrying price pressures looming over the UK economy right now".

"High domestic costs and geopolitical headwinds are combining to create choppy inflationary waters for businesses to navigate," he said.

A recent BCC survey of almost 5,000 businesses found 66 per cent cited inflation as a concern, while 52 per cent said fuel costs were putting upward pressure on their prices.

The organisation said members of its Economic Advisory Council unanimously expected the Bank to hold rates at 3.75 per cent this week.

The Bank's own July survey of market participants also showed a hold as the central expectation, with respondents assigning an average 71 per cent probability to Bank Rate remaining at 3.75 per cent in September.