UK inflation rises to 2.9% as forecast energy cap hike erases winter VAT relief

Inflation uptick and interest rate expectations

Annual consumer price inflation in the United Kingdom climbed to 2.9% in July from a 15-month low of 2.6% in June, matching market projections. The Bank of England had earlier projected a smaller rise to 2.8% at the end of last month, while maintaining its headline inflation target of 2%. Food inflation provided some relief, dropping to 1.3%, its lowest level in nearly five years. A majority of economists surveyed by Reuters expect the central bank to keep the benchmark interest rate steady at 3.75%, though financial traders have priced in at least one rate hike before the end of the year.

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.

Projected energy cap rise offsets tax relief

British households face a projected 4% increase in the energy price cap from October, according to analysis from energy consultancy Cornwall Insight. The forecast sets the annual dual-fuel bill for a typical direct-debit household at £1,729 for the final quarter of 2026, reaching its highest level since July 2023. Under the previous calculation methodology, the cap would have reached £1,940.69. The estimated rise increases electricity rates from 26.11p to 26.57p per kilowatt hour and gas charges from 7.33p to 7.90p. This rise is projected to erase the financial benefit of Prime Minister Andy Burnham's planned VAT cut on electricity, which was designed to save households an average of £45 annually.

It is a stark reminder that our energy bills remain tied to events thousands of miles away.

Middle East conflict and wholesale energy pressures

Wholesale UK natural gas prices moved above 158p per therm on 19 August 2026, marking their highest point since January 2023, though remaining well below the 2022 level above 600p. Upward pressure on energy markets follows the ongoing war involving Iran alongside heightened gas demand from power plants during European heatwaves. Energy regulator Ofgem, which previously increased the household price cap by 13% on 1 July, is scheduled to formally announce the October cap on 26 August. Chancellor John Healey stated that the government is navigating the fallout of the Middle East conflict, arguing that the domestic economy maintains underlying resilience.

To many households this will feel like a horrible reminder of the first gas crisis after Russia invaded Ukraine. Even more worrying is that wholesale gas prices have reached a near four-year high which is likely to cause more increases to future bills.

Property prices contract as rental costs rise

Official figures from the Office for National Statistics showed average UK house price growth slowed to 2.0% in the 12 months to June, down from 3.0% in May. The average UK home price fell by 0.2% month-on-month in June to £272,000. Regional trends showed marked divergence: average prices reached £293,000 in England (up 1.8% annually), £213,000 in Wales (up 1.8%), £195,000 in Scotland (up 2.3%), and £202,000 in Northern Ireland (up 9.2% in the second quarter). London recorded an annual price decline of 2.5%, marking its tenth consecutive month of annual contraction. Across the rental sector, average monthly private rents rose by £50, or 3.7%, to reach £1,393 in July.