UK inflation climbed to 2.9% in July, up from 2.6% in June, pushing further above the Bank of England’s 2% target and putting renewed pressure on household budgets across the country.
According to Dr Maria Paola Rana, macroeconomic expert at the University of Salford, the jump is being driven largely by one culprit: energy costs. But there’s a bigger question hanging over the numbers — is this a temporary spike, or the start of something more persistent?
Why Is Inflation Rising? Energy Bills Take the Blame
Energy bills were the main driver of July’s increase. Ofgem’s 13% rise in the energy price cap at the start of the month resulted in the sharpest summer increase in household energy costs in four years.
“Energy bills were the main driver of the increase,” said Dr Rana. “Ofgem’s 13% rise in the energy price cap at the start of July resulted in the sharpest summer increase in household energy costs in four years. At the same time, the conflict involving Iran has unsettled global energy markets, adding further pressure to gas and electricity prices.”
That combination — a domestic price cap hike layered on top of geopolitical instability — has left households facing higher bills at a time of year when energy costs are typically more manageable.
The Silver Lining — Food Inflation Slows
It’s not all bad news. Food and drink inflation slowed to 1.3% in July, its lowest rate in nearly five years, offering some relief at the supermarket checkout. Falling oil prices have also helped ease some of the costs faced by businesses more broadly.
Still, Dr Rana cautioned against reading too much into the improvement. “But heatwaves, droughts and geopolitical tensions mean food and energy prices remain vulnerable,” she noted — a reminder that these gains could easily reverse.
Where Is Inflation Headed Next?
The outlook isn’t especially reassuring. Economists expect inflation could reach around 3.5% by the end of the year, adding to the government’s cost-of-living challenge and further complicating decisions over spending and borrowing ahead of October’s Budget.
For households already stretched by rising bills, that trajectory means the squeeze may not ease any time soon.
Will the Bank of England Raise Interest Rates?
Despite inflation running well above target, Dr Rana thinks a rate hike next month is unlikely.
“So, will the Bank of England raise interest rates next month? Probably not,” she said. “With wage growth slowing, job vacancies at a five-year low, and much of the latest inflation being driven by higher energy prices, the Bank of England may simply wait it out, rather than raising interest rates in response to what could prove to be a temporary energy-driven spike in inflation.”
In other words, the Bank appears more inclined to look through the current spike than react to it — at least for now.
What This Means for October’s Budget
The timing is awkward for the government. With inflation expected to keep climbing into the autumn, ministers face a tighter set of choices on spending and borrowing just as they prepare October’s Budget. Higher inflation tends to push up the cost of servicing debt and squeezes the room for new spending commitments, making an already difficult balancing act harder still.
The Bottom Line
Inflation is heading up again, but the real question — as Dr Rana puts it — is whether this is a temporary energy-driven spike or the beginning of more persistent pressure on household budgets.
For now, households should keep an eye on three things: further movement in Ofgem’s energy price cap, the Bank of England’s next interest rate decision, and how October’s Budget responds to a tightening fiscal picture.
Commentary provided by Dr Maria Paola Rana, macroeconomic expert at the University of Salford.
