UK inflation picked up again in July, driven largely by a sharp increase in household energy bills as the economic impact of the Iran war continues to filter through to consumers.
Annual inflation rose to 2.9% from 2.6% in June, reaching a four-month high and matching economists’ expectations. The figure was slightly above the Bank of England’s 2.8% forecast.
The biggest pressure came from energy. Britain’s regulated household energy price cap increased by 13% in July, pushing electricity and gas bills higher.
Still, there were some encouraging signs beneath the headline number:
- Core inflation remained unchanged at 2.6%
- Services inflation eased to 3.4%
- Food and non-alcoholic drink inflation slowed to 1.3%
- Wage growth cooled to 3.2%
These figures suggest the rise in inflation is still concentrated heavily around energy rather than spreading rapidly across the wider economy.
The Bank of England expects inflation to peak at around 3.2% later this year, although the outlook remains heavily dependent on energy prices and developments in the Middle East. Most economists surveyed by Reuters expect the central bank to keep interest rates unchanged at 3.75% for the rest of 2026.
Markets took the report relatively calmly. The British pound held around $1.355 against the dollar after the figures were released.
Investor takeaway: UK inflation is moving higher again, but the details are less worrying than the headline suggests. If wage and services inflation remain contained, the Bank of England may be able to keep rates steady despite the temporary pressure from higher energy costs.
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