UK consumer price inflation accelerated to 2.9% in the 12 months to July, marking the highest level since March and aligning with market expectations. The increase, up from 2.6% in June, slightly exceeded the Bank of England’s July projection of 2.8%.
The rise was primarily attributed to a surge in household energy costs after the Ofgem quarterly price cap reset added £221 to the average dual-fuel bill. Gas prices jumped 14.7% year-on-year, the largest annual increase since October 2022, while electricity prices climbed 3.6%. The next Ofgem reset, scheduled for August 26, is expected to push the typical bill to around £1,941.
Core inflation, which excludes energy, food, alcohol, and tobacco, remained unchanged at 2.6%, defying forecasts for a slight easing to 2.5%. Services inflation edged down to 3.4% from 3.6%, while goods inflation outside these categories stayed below 1% for a third consecutive month. Food and drink inflation fell to 1.3%, the lowest since August 2024 and its weakest reading since late 2021.
The broader measure of inflation including owner-occupied housing costs, CPIH, rose to 3.1% from 2.8%.
Analysts noted that the inflationary pressures remained concentrated in energy, with limited spillover into other sectors. Jefferies economist Modupe Adegbembo said the increase was "driven almost entirely by the Ofgem energy price cap reset, not a broadening of price pressure." Capital Economics’ Ruth Gregory highlighted that businesses were not yet raising prices elsewhere to offset higher energy costs, while food and drink inflation had declined for four consecutive months.
Deutsche Bank’s Sanjay Raja acknowledged signs of cooling in food and services inflation but warned that "some further upside to inflation looks likely" as energy prices remain elevated. Financial Markets Online’s Samuel Fuller described the data as evidence that "the inflationary whiplash of the Iran war has finally hit."
The Bank of England is expected to maintain its benchmark interest rate at 3.75% through 2026 before reducing it to 3.00% in 2027, according to Capital Economics, a more dovish outlook than prior market pricing that had suggested potential increases to 4.25%-4.50%.
