Key Takeaways:
- UK inflation is now at the highest since March 2026 as the impact of the Iran war on domestic energy bills starts being felt.
- Still, price rises in food and non-alcoholic beverage prices are showing signs of moderating.
- The Bank of England is not expected to increase interest rates this year.
UK inflation rose to 2.9% in the 12 months to July, a four-month high, in line with expectations following the increase to the Ofgem energy price cap at the start of that month.
Housing and household services, including energy, made the largest upward contributions to the Consumer Prices Index figure, the Office for National Statistics said. This was partially offset by transport costs, which rose by 3.6% in the 12 months to July versus a 5.7% increase the previous month. Core CPI, which excludes more volatile energy and food costs, was unchanged once more at 2.6%.
“With utility prices resetting, the second half of 2026 was always going to be harder on the inflation trend than the first,” says Michael Metcalfe, head of macro strategy at State Street Markets.
Why Is UK Inflation Rising?
The UK’s statistics body highlighted rising energy bills as a strong driver of the latest rise in inflation, noting in particular higher gas prices, which rose by 14.7% in July from a year ago.
This was the largest rise in gas prices since October 2022, the ONS said, when consumers had been exposed to rising energy prices as a result of the war in Ukraine. With Ofgem increasing its domestic energy bill price cap in July by 13%, it’s the first time that the effects of the Iran war are reflected in household energy prices.
Economists have expressed surprise that increases to food and non-alcoholic beverage prices have remained subdued, which ING developed markets economist James Smith calls “highly unusual.” Prices in this division rose by 1.3% in the 12 months to July, versus a 1.7% increase in the 12 months to June. He says the figures could give those members of the Bank of England’s Monetary Policy Committee who were previously in favor of raising rates pause for thought.
“A quick glance at producer prices suggests consumer food inflation could theoretically even go negative in annual terms over the next few months. We’re not convinced that will happen—and it was always going to take at least a year for the full effects of the Iran war to show up here,” ING’s Smith says.
Will The Bank of England Increase Interest Rates in 2026?
The Bank of England will meet on Sept. 17, a day after the ONS’s next inflation data release covering August 2026. Activity in derivatives markets previously indicated a rate hike at the Bank’s November meeting was likely, but now signals no interest rate rises for the next three meetings.
When Are the Next UK Inflation Releases?
- Sept. 16, 2026
- Oct. 21, 2026
- Nov. 18, 2026
- Dec. 16, 2026
At its last meeting in July, the BoE suggested it was prepared to act if prices continue to rise, but most economists agree it may not even come to that.
“Inflation looks likely to accelerate further in August, but as long as inflation remains in the low threes, in line with forecasts, the new more balanced, even dovish, tone of the Bank of England suggests they may escape the year without having to move interest rates at all,” says State Street’s Metcalfe.
