UK inflation accelerated to 2.9% in the 12 months to July, its highest reading since March, as a 13% jump in the energy price cap pushed gas bills sharply higher. The pound held steady near $1.354 as traders trimmed bets on a Bank of England rate hike.
Energy bills drive the headline rate higher
UK inflation accelerated: the consumer prices index rose to 2.9% in July, up from 2.6% in June, according to the Office for National Statistics. Regulator Ofgem raised the household energy price cap by 13% on July 1. The Office for National Statistics said the increase was driven by the largest rise in gas prices since October 2022. Gas prices within the housing category rose 14.7% in July, compared with a 7.2% fall a year earlier.
Furniture and clothing added further upward pressure. Furniture and household goods prices rose 1% year on year in July, reversing a 0.2% annual fall in June. Clothing and footwear prices, meanwhile, rose 0.5% in July after falling 0.5% the previous month.
Bank of England holds rate, traders pare hike bets
The Bank of England kept its interest rate unchanged at 3.75% at its July meeting despite inflation running above its 2% target, with policymakers voting six to three to hold borrowing costs. Core inflation, which excludes energy and food, held at 2.6% in the 12 months to July, slightly above the 2.5% economists had forecast. Services inflation, meanwhile, eased from 3.6% to 3.4% over the month.
After the data, market pricing for a quarter-point rate rise at the September meeting fell to about 18%, down from 27% before the release. The pound was little changed at $1.354 following the release.
Outlook points to further increases
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, called the rebound "a warning shot for what could come next". The Bank of England has forecast inflation will rise to 3.2% towards the end of the year before easing to an average of 2.7% in 2027.
KPMG chief economist Yael Selfin said energy-related costs were expected to push inflation to a peak of about 3.5% in the coming months.
Chancellor John Healey said the war between the US and Iran was continuing to affect prices, but that Britain's economy remained resilient, pointing to the cut in VAT on electricity bills and the cap on bus fares.
Sources: BBC News, The Guardian, Financial Times
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