The UK consumer price index (CPI) rose from 2.6% to 2.9% in July, marking the first time since March 2026 that the 12-month rate had increased, according to data from the ONS.
The biggest contributor to this was housing and household services, which shot up to 4.1% in July, up from 2.7% in June, mostly due to surging energy and gas prices.
The 12-week assessment period used in this data covers February to May, making it the first inflation assessment period this year to include the impact of the conflict in the Middle East. The resulting 14.7% surge in gas prices is the largest rise since October 2022, when the war in Ukraine had a similar impact on prices.
In total, gas prices are now at their highest levels since March 2024, according to the ONS.
Jonathan Raymond, investment manager at Quilter Cheviot, said: “A renewed spike in inflation has been expected as the war in the Middle East continues to navigate a clunky ceasefire.
“Things remain far from normal in the Strait of Hormuz and look unlikely to be resolved any time soon, meaning pressure is likely to remain on prices for the remainder of the year at least.”
While Raymond noted that cuts to VAT on energy bills may feed through to the numbers soon, he expected these not to move the dial too heavily.
Felix Feather, an economist at Aberdeen, noted the jump in inflation “comes as no surprise” as rising energy costs looked “inevitable” given the geopolitical circumstances.
See also: UK employment data nears ‘something of a trough’ as job vacancies fall by 0.8%
However, Feather noted there was “little sign of contagion of the energy shock to other goods and services; core inflation remained at 2.6%, while the services measure fell back a touch.”
Susannah Streeter, chief investment strategist at Wealth Club, agreed that it was helpful that petrol and diesel prices fell in July, while the core rate of inflation held steady in July (once volatile food and fuel prices are stripped out).
“This will be more reassuring for the Bank of England, especially with services inflation easing from 3.6% to 3.4%,” Streeter said. “Policymakers will also have an eye on the cooling labour market, with vacancies falling and public-sector pay increases easing.”
As a result of this rising inflation, experts’ expectations for the Bank of England remained divided.
Streeter noted: “Right now, two interest rate hikes are still priced in by financial markets, but forecasts have changed wildly, and much will depend on the data in the months to come.”
Meanwhile, Quilter’s Raymond argued that the central bank may be a bit more cautious and opt to wait for more concerning data before acting, and so one rate hike may remain the “direction of travel” this year, he said.
“Interest rates back at 4% will be difficult for consumers to stomach, but until it is clear that the impact of events in the Middle East has subsided and the UK economy is back on an even keel, this period of higher for longer is likely to remain in place for the foreseeable future.”
Meanwhile, Aberdeen’s Feather argued that interest rates may be held this year, pointing to a slowdown in domestically generated inflation and softer labour market conditions.
David Rees, head of global economics at Schroders, broadly agreed: “The good news is that persistent slack in the labour market leaves the UK better placed than most developed economies to avoid these shocks generating second-round inflation effects.
“That should allow the Bank of England to look through the near-term rise in inflation and continue to push back against market pricing for rate hikes,” he concluded.
See also:Geopolitics and government debt top wealth manager worry list
