Key facts
- UK consumer price index inflation rose to 2.9% in the 12 months to July.
- The previous inflation reading was 2.6%.
- Services inflation eased to 3.4%, and core inflation was 2.6%.
- Factors contributing to the rise included furniture and clothing prices.
- Raw material and factory gate prices slowed due to lower oil prices.
- Economists anticipate inflation to peak around 3% later this year or in early 2027.
Inflation in the United Kingdom has risen to 2.9% for the 12 months ending in July, an increase from the previous 2.6% reading, according to data from the Office for National Statistics (ONS). This uptick, attributed partly to furniture and clothing prices falling less than usual and a slowdown in raw material costs driven by lower oil prices, follows the reset of the energy price cap and signals a potential start to a sustained period of higher price growth.
Services inflation, a key indicator for Bank of England policymakers, eased to 3.4%, while core inflation, excluding volatile food and energy prices, stood at 2.6%. City economists widely predict that inflation will peak later this year or in early 2027, reaching at least 3%, as the effects of fluctuating energy prices continue to impact households.
The rise in inflation could pose challenges for cost of living initiatives, potentially limiting the government's fiscal flexibility for tax cuts or increased spending. This comes as UK borrowing costs have intensified, with 10-year gilt yields reaching a near two-decade high. The government recently sold medium-term bonds at a yield of 5.155%, the highest since 2007.
The Bank of England has previously indicated that it may need to raise interest rates if trade flow disruptions in the oil and gas sectors persist due to geopolitical tensions in the Gulf region. Traders are divided on the likelihood of a rate hike at the upcoming September decision, but higher borrowing costs could further pressure government plans to alleviate the cost of living for households and businesses.