UK inflation rises to 2.9% as energy costs add pressure

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UK inflation rises to 2.9%

Highlights

UK inflation rises to 2.9% in July from 2.6% in June, matching forecasts, primarily due to surging energy prices and Ofgem's 13% price cap increase.
Core inflation registers 2.6%, slightly above 2.5% estimates, while services inflation eases to 3.4%, and the pound remains steady at $1.354 post-release.
BoE leaves rates unchanged by a six-to-three vote but markets anticipate at least one 25bps hike by year-end amid persistent cost pressures and Iran conflict fallout.

July inflation data and policy backdrop

As reported by Financial Times, citing the Office for National Statistics, UK inflation reaches 2.9% in July, up from 2.6% in June and in line with economists’ forecasts in a Reuters poll. The reading reflects stronger price pressures at a time when the Bank of England maintains a cautious stance on interest rates.

The latest increase is driven mainly by rising energy prices, with gas costs recording their sharpest increase since 2022. Ofgem raises its energy price cap by 13% from July because of higher commodity prices, helping push the headline inflation rate higher.

Core inflation, which excludes energy and food, stands at 2.6% in the 12 months to July, slightly above the 2.5% forecast by economists. Services inflation eases to 3.4% from 3.6%, while smaller upward contributions come from furniture and clothing.

Market and household impact in the UK

The inflation figure compounds pressure on Prime Minister Andy Burnham as the government seeks to ease cost of living strains while pursuing stronger growth across the country. Higher oil and gas prices linked to the Iran conflict are also shaping expectations for monetary policy through the rest of the year.

At its July meeting, the BoE’s Monetary Policy Committee votes six to three to leave rates unchanged. Even so, traders are pricing in the prospect of at least one quarter-point increase by the end of the year, while the pound is little changed immediately after the data at $1.354.

Responding to the figures, Chancellor John Healey says the effects of the Iran war continue to affect prices in Britain, while arguing that the economy remains resilient. He says the government has cut VAT on electricity bills and capped bus fares at £2 to help households facing higher living costs.

In our earlier article on the Burnham government’s devolution push, we covered plans to shift responsibility for economic growth away from the Treasury and toward “Number 10 North” in Manchester as part of a wider transfer of power from Whitehall. We also noted that Chancellor John Healey is expected to set out a broader economic strategy ahead of his first budget, positioning regional governance as a key lever for boosting growth.

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