Key facts
- UK inflation increased to 2.9% in July.
- The rise in inflation is attributed to higher energy prices stemming from the Middle East conflict.
- Job market figures indicate a slowdown, potentially influencing the Bank of England's monetary policy decisions.
- The Bank of England is contemplating an interest rate increase in the near future.
- The government has introduced measures to alleviate the cost of living crisis, such as a VAT reduction on electricity.
UK inflation climbed to 2.9% in July, a rise from 2.6% in June, largely driven by escalating energy prices influenced by the conflict in the Middle East. This development exacerbates the cost of living squeeze for British households, posing a significant challenge for Prime Minister Andy Burnham's administration.
City economists had anticipated the increase in the Consumer Prices Index (CPI). The surge in energy costs follows the sharpest summer increase in four years, triggered by geopolitical tensions. This situation places pressure on the Bank of England, which is evaluating a potential interest rate hike as early as next month to combat fears of entrenched inflation.
However, recent data indicating a slowdown in the jobs market, including a decline in job vacancies and subdued private sector pay growth, may dissuade the central bank from immediate action. Despite earlier resilience and the fastest growth rate in the G7 during the first half of 2026, inflation had shown signs of cooling. The conflict in the Middle East and adverse weather impacting global food production have rekindled concerns about rising inflation worldwide.
The Bank of England had previously maintained borrowing costs, warning that a further escalation of the war could push UK inflation to a peak of 4.5% by mid-2027. In response to the economic pressures, Prime Minister Burnham announced measures aimed at providing "breathing space" to consumers, including a VAT cut on electricity bills expected to lower inflation by 0.1 percentage points.