UK July inflation rises to 2.9% as energy price cap increase lifts household bills

Energy price cap drives July acceleration

The Office for National Statistics reported on Wednesday that annual consumer price inflation in the United Kingdom rose to 2.9% in July, climbing from a 15-month low of 2.6% in June. The increase matched forecasts from economists polled by Reuters, though it exceeded the Bank of England's projection of 2.8% published in late July. The reading marked the first acceleration in consumer price growth since March.

The primary catalyst was a 13% increase in the household energy price cap implemented by regulator Ofgem on 1 July, which added £221 to average annual gas and electricity bills, bringing them to £1,862. Mike Hardie, deputy director for prices at the Office for National Statistics, detailed the components behind the move.

Inflation rose in July, driven by a sharp increase in gas prices following this month's change to the energy price cap. This was the largest rise in gas prices for almost four years. Other upward pressures included furniture prices falling by less than usual for this time of year, and also a smaller fall for clothing prices due to reduced discounting.

Core inflation and commodity pressures

Core consumer price inflation, which strips out energy and food prices, reached 2.6% in July, exceeding the median 2.5% forecast in the Reuters poll. The Retail Prices Index rose from 3.0% in June to 3.2% in July, a metric used to set regulated railway fares for 2027.

Global energy pressures linked to the conflict between the United States and Iran continued to feed into domestic import costs. Crude oil traded above $90 a barrel following the continued closure of the Strait of Hormuz, which normally carries one fifth of global oil and gas supplies. According to J.P. Morgan Personal Investing, British petrol prices rose 6.3% in August compared to July, indicating further upward pressure on upcoming price readings.

Government response and upcoming budget

Chancellor of the Exchequer John Healey responded to the figures by pointing to external drivers while affirming the stability of the domestic economy.

Iran war inflation continues to impact prices here at home, but Britain's economy is resilient. We have cut VAT on electricity bills and capped bus fares at £2 - to give breathing space to those feeling the strain. There is more to do to restore hope and build a stronger economy.

Prime Minister Andy Burnham, who took office in July after replacing Keir Starmer, has introduced targeted measures to manage household living costs. The government announced the removal of VAT on domestic electricity for the coming winter and reinstated a £2 cap on bus fares across England effective January. John Healey is scheduled to present the administration's first formal budget on 28 October.

Bank of England policy outlook

The Bank of England maintains a 2% consumer inflation target with its key interest rate set at 3.75%. Financial markets and forecasters remain divided over the central bank's next interest rate decision. Data compiled by LSEG shows traders pricing in at least one interest rate increase this year, whereas a majority of economists surveyed by Reuters expect the benchmark rate to stay at 3.75%.

Domestically generated inflation remains contained. We remain content with our view that provided energy prices don't rise much further, CPI inflation will fall to 2.0% by the end of next year.

Following the release, sterling gained 0.14% against the US dollar to reach $1.3552, while trading at 85.56 pence against the euro. Analysts at Goldman Sachs noted that the gap between market hike expectations and potential central bank inaction could create downward pressure on the currency in coming months.