The UK economy saw its inflation rate climb to 2.9% in July, driven primarily by a substantial increase in household energy costs. The figures, released by the Office for National Statistics, end a recent pattern of falling inflation and align with expectations from economists.
The acceleration in annual consumer price growth—from June’s 2.6% to July’s 2.9%—was triggered by a 13% jump last month in the regulated cap on household energy prices. This adjustment marked the sharpest increase in energy bills since the energy crisis sparked by the onset of the Russia-Ukraine war in 2022.
Economists polled ahead of the data release largely anticipated the 2.9% inflation rate for July, while the Bank of England had projected a smaller uptick to 2.8%. The central bank currently anticipates inflation to peak at 3.2% later in 2026.
The resurgence in inflation comes as Prime Minister Andy Burnham maintains a focus on alleviating cost-of-living concerns. However, stretched public finances ahead of October’s annual budget may limit the government’s options for providing support to households.
Core inflation, which leaves out volatile items such as energy and food, remained steady at 2.6% rather than dipping to the 2.5% anticipated by market analysts. Services inflation slipped to 3.4% from June’s 3.6%. Meanwhile, food and non-alcoholic beverage inflation eased to a 1.3% annual rate, a low not seen in nearly two years.
Factory gate inflation also moderated, recording a 3.1% increase in July compared to 3.5% previously. In addition, manufacturers’ input cost growth slowed to 4.9% from 7.4%, partially due to declining oil prices for a second consecutive month, though recent data indicates this relief may be short-lived as oil prices have rebounded 11% over the past two weeks.
Labour market data released earlier showed some cooling, potentially softening the impact of inflation from ongoing geopolitical tensions in Iran. With these developments, the Bank of England is expected to keep its key interest rate unchanged at 3.75% for the remainder of the year. Some forecasts suggest rate reductions could resume in early 2027, depending on inflation’s trajectory.
