UK inflation has accelerated sharply to its highest level since March, putting renewed pressure on households, businesses and the government as higher energy costs linked to instability in the Middle East threaten to keep prices elevated in the months ahead.
Consumer Prices Index (CPI) inflation rose to 2.9% in July from 2.6% in June, according to official figures, reversing the decline that had taken inflation to a 15-month low the previous month.
The increase comes after a 13% rise in Ofgem’s energy price cap in July, pushing the average annual household gas and electricity bill up by £221 to £1,862. The increase in energy costs has emerged as one of the principal drivers of the latest inflation figures, reinforcing concerns that geopolitical instability and global energy markets could continue to influence the cost of living in Britain.
The latest figures present an early economic challenge for Andy Burnham’s government as it faces pressure to support households while simultaneously creating conditions for businesses to invest and expand.
While inflation remains significantly below the peaks experienced during the earlier cost-of-living crisis, its movement further away from the Bank of England’s 2% target complicates the economic outlook. The central bank must balance persistent price pressures against a weakening labour market and subdued economic activity.
Official figures show that core inflation, which excludes volatile energy and food prices, remained unchanged at 2.6% in July. The stability of core inflation suggests that the latest acceleration in headline inflation has been driven largely by specific external and regulated price pressures rather than a broad-based acceleration across the economy.
ONS Deputy Director for prices Mike Hardie indicated that the latest increase was primarily linked to energy costs.
“Inflation rose in July, driven by a sharp increase in gas prices following this month’s change to the energy price cap. This was the largest rise in gas prices for almost four years.”
Mike Hardie
He added that other upward pressures came from furniture and clothing prices, with furniture prices falling by less than usual for the time of year and clothing prices experiencing a smaller decline because of reduced discounting.
“The prices of raw materials and goods leaving factories slowed again, driven by a drop in the prices of crude oil and refined petroleum respectively.”
Mike Hardie
The figures also reveal that the UK’s broader measure of inflation, CPIH, which includes owner-occupiers’ housing costs and other household expenses, rose from 2.8% to 3.1%.
Housing and household services, along with furniture, made the largest upward contributions to the CPIH increase.
The energy shock also creates a difficult environment for businesses, particularly firms with high electricity, gas, transport or production costs. Companies may be forced to absorb some of the additional costs, reduce investment or eventually pass them on to consumers through higher prices.
The pressure is further complicated by uncertainty surrounding the conflict involving Iran and its potential impact on global energy supplies.
With no clear end to the conflict, economists have warned that renewed volatility in international energy markets could feed into British inflation through fuel, heating and production costs.
The effect could extend beyond household utility bills. Energy is a fundamental input across the economy, meaning sustained increases in oil and gas prices can raise the cost of transportation, manufacturing, agriculture and food production.
Food Prices and Extreme Weather Add to Inflation Risks
While there was some respite from food inflation in July, industry leaders and analysts cautioned that this improvement might not endure as producers deal with growing production costs and more unpredictable weather.
The annual inflation rate for food and drink decreased from 1.7% in June to 1.3% in July, providing some relief to those that are under strain at the grocery store checkout.
Nonetheless, the numbers revealed notable variations among the various goods. Fruit prices increased by 8.1% over the year, while fish prices increased by 13.6%. On the opposite end of the spectrum, butter prices dropped by 5.3% and pizza costs dropped by 8.5%.
The Food and Drink Federation stated that, the continuing decline in food inflation was encouraging, particularly given the supply-chain pressures associated with the conflict in Iran.
However, the organisation’s Chief Economist, Dr Liliana Danila, warned that manufacturers could struggle to absorb additional costs indefinitely.
She added that the supply-chain disruption and “extreme weather” would make it “very challenging for manufacturers to swallow any higher costs.”
Kevin Brown of Scottish Friendly similarly warned that the inflationary pressure facing households could become more visible in grocery bills as the year progresses.
“Energy may only be exerting part of the pinch this autumn. Expensive fuel and fertiliser are adding pressure to food production and supply chains, while an exceptionally hot summer raises another threat to harvests.”
Kevin Brown
He added, “as a result, families may continue to feel the inflationary fallout from this at the till as well as through their utility bills.”
Despite the latest increase, financial markets and economists are not widely expecting the Bank of England’s Monetary Policy Committee to respond with an immediate increase in interest rates.
The reason is that the wider economic environment remains fragile. Unemployment is close to 5%, while job vacancies have fallen to their lowest level in around five years.
David Rees, Head of Global Economics at Schroders, argued that UK remained relatively well positioned to avoid a more persistent inflation spiral.
With unemployment elevated and labour demand weakening, businesses may have less ability to increase wages aggressively or pass every additional cost directly on to consumers.
However, economists remain cautious about the trajectory of prices. Yael Selfin, Chief Economist at KPMG, expects inflation to continue rising and potentially reach around 3.5% by the end of the year.
She stressed that “the outlook remains highly dependent on how the conflict in Iran evolves and its impact on global energy prices.”
That uncertainty creates a difficult policy environment for Burnham’s government, which must respond to rising living costs while also attempting to encourage economic growth.
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