Key Takeaways:
- Transport costs drove UK inflation higher than markets were expecting in July.
- The Bank of England is now widely expected to pause rate cuts amid sticky inflation.
- The UK’s weakening labor market could still prompt the BOE to cut rates in the future.
Rising airfares and fuel costs drove UK inflation higher than expected to 3.8% in July 2025—the largest increase since January 2024. The news will dampen hopes of another rate cut by the Bank of England by the end of the year.
In a fresh bulletin on Wednesday morning, the UK Office for National Statistics said the Consumer Prices Index increased by 3.8 % in the 12 months to July 2025, an acceleration on the 3.6% recorded for the 12 months to June. Markets had anticipated a 3.7% rise. The Bank of England had predicted 3.76% for July, slightly above market expectations.
Core inflation also came in at 3.8% for July, a rise from 3.7% in June.
The news comes as the UK economy posted lower gross domestic product growth of 0.3% for the period April to June 2025. Experts say Wednesday’s figures reflect rising taxation being passed onto consumers in the form of higher prices. Together, the two phenomena could constitute so-called “stagflation.”
“The specter of stagflation looms over the UK economy,” says Jonathon Marchant, fund manager at Mattioli Woods.
“Last year’s Autumn Budget has continued to weigh on business confidence while imposing significant additional costs on employers, expenses that will likely filter through to consumers via higher prices. With this year’s Autumn Budget approaching, the Monetary Policy Committee may prefer to pause and assess the Budget’s consequences before implementing further rate reductions.”
Which Prices Are Rising in the UK?
The ONS says rising prices in the transportation segment of its data are largely to blame for higher inflation in July, with prices rising 3.2% in the 12 months to July 2025, up from 1.7% in the 12 months to June. On a monthly basis, transport prices rose by 2.2% in July, compared with a rise of just 0.7% one year prior.
The rise in the annual rate reflected a large upward effect from airfares, which rose by 30.2% between June and July 2025, compared with a rise of 13.3% between the same months in 2024, the ONS said.
“The monthly rise in July 2025 is the largest July increase since collection of airfares changed from quarterly to monthly in 2001 and was probably influenced by the timing of school summer holidays,” it commented.
“Returning European flights were during the school term in 2024, whereas returning European flights were during the school holidays in 2025, which may have made these flights more expensive.”
Rising prices in transportation are also a result of rising fuel costs. The average price of petrol rose by 2p per liter between June and July this year, the ONS said, compared with a fall of 1.4p per liter between June and July 2024. Diesel prices also rose by 2.9p in July, having fallen 1.1p in July 2024.
Will the Bank of England Cut Rates Again This Year?
Most commentators agree that a fourth rate cut by the Bank of England in 2025 now looks unlikely. Given the Bank’s latest Monetary Policy Committee vote was the closest-run decision in its 28-year history, some say the quarterly “cadence” of rate cuts originally anticipated in January this year is now close to impossible.
“With the Bank of England now divided on the need to ease further, their maintenance of a quarterly cadence for cuts faces significant challenges. It could be next year before we see another move,” says Tim Graf, head of macro strategy EMEA at State Street.
Nevertheless, some investment banks are sticking with their dovish outlooks—in part because the UK’s labor market is weakening as employers delay hiring and businesses restructure.
“While a November pause is certainly possible with upside surprises to the data, we believe that the market is underpricing the chance of a cut in November,” Goldman Sachs economists Jari Stehn and James Moberly say in a note.
“Increasing labor market slack is consistent with our estimates that the economy is now operating significantly below potential. There’s a great deal of uncertainty about the BOE’s plans for lower interest rates, but the team projects that the central bank’s terminal rate (the point at which it stops cutting rates) will be 3%— below market expectations of 3.5%.”
