UK inflation is expected to accelerate sharply in July, threatening to reopen a difficult debate for the Bank of England over how quickly it can cut interest rates as higher energy bills collide with emerging food-price pressures.
Economists broadly expect the consumer price index to rise to 2.9%, from a 15-month low of 2.6% in June. That would mark the highest inflation rate since March and leave price growth almost a full percentage point above the Bank’s 2% target.
The immediate culprit is the 13 per cent increase in Ofgem’s energy price cap that took effect last month, lifting the typical household’s annual gas and electricity bill by £221 to £1,862.
Ellie Henderson, an economist at Investec, estimates the increase alone will add about 0.5 percentage points to July’s inflation rate, the Independent reported.
“The July increase to the Ofgem energy price cap [is] likely to erase any progress towards the Bank of England’s 2% target,” she said.
The concern for policymakers is that the energy shock may prove less temporary than the headline figures suggest. Disruption to energy markets linked to the Iran war and the effective gridlock around the Strait of Hormuz could keep costs elevated into the winter, creating a fresh challenge for a central bank already attempting to balance inflation against weak economic growth.
Victoria Scholar, head of investment at Interactive Investor, expects inflation to climb above 3% later this year and predicts the Bank could raise its 3.75% interest rate to 4 per cent before December.
“The Bank of England is likely to carry out roughly one 25 basis point hike by the end of the year,” she said.
Food prices represent another emerging risk. The Food and Drink Federation has warned that heatwaves and drought across Britain and Europe are damaging supplies of fruit, vegetables and grains, potentially feeding through into supermarket prices and keeping food inflation elevated into 2027.
The figures will also have implications beyond monetary policy. The Office for National Statistics’ July retail price index will help determine next year’s rail fare increase, although the government has yet to decide whether to extend its 2026 fare freeze.
Britain’s inflation problem, once thought to be receding, is therefore acquiring a more persistent character: energy is rising, harvests are deteriorating and the prospect of cheaper money is moving further away.
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