Key Takeaways
- Economists forecast a 2.9% rise in inflation for July as a result of the higher energy price cap, which reset at the start of that month.
- Core inflation, which strips out volatile food and energy prices, is expected to soften.
- Despite the expected rise in the Consumer Prices Index, analysts expect the Bank of England to hold interest rates steady at its September meeting.
The latest inflation data is expected to show a rise in prices in July as the impact of the Iran war continues to feed through to household energy bills, economists say.
The Consumer Prices Index, which the Office for National Statistics releases on Wednesday, is expected to come in at 2.9%, up from 2.6% in June, according to FactSet consensus. The increase is likely to be driven by higher domestic energy bills following the recent 13% jump in Ofgem’s energy price cap, according to economists. The cap, which reset on July 1, initially sheltered consumers from the surge in energy prices following the outbreak of the Middle East conflict.
Core inflation, which strips out volatile food and energy prices, is predicted to ease 0.1 percentage point to 2.5%.
Price pressures are “brewing again” as the Middle East conflict continues to keep energy prices elevated, says Deutsche Bank chief UK economist Sanjay Raja. This is despite recent government measures to reduce the cost of living, such as discounted leisure activities this summer and the cut in VAT on electricity bills from October, he says. Deutsche Bank expects UK inflation to peak at around 3% this year, before easing to 2.4% next year.
When Are the Next UK Inflation Releases?
- Sept. 16
- Oct. 21
- Nov. 18
- Dec. 16
UK Economic Growth Beats Expectations
July’s data will inform the Bank of England’s next move on interest rates at its Sep. 17 meeting, after leaving rates unchanged at 3.75% so far this year. Markets are currently pricing in a small chance of a rate hike at September’s meeting, though a single increase to 4% is expected by the end of the year. Rate setters will have a further set of inflation data to digest before the September meeting, with August’s CPI figures due on Sep. 16, analysts note.
Raymond James European strategist Jeremy Batstone-Carr says the Monetary Policy Committee will also take note of the latest set of GDP figures, which revealed the UK economy grew 0.3% in June and 0.4% in the second quarter despite added economic pressure from the Iran war. He says the Bank will view the growth data as “vindication” for its decision to keep rates unchanged, explaining that tighter monetary policy can choke off economic activity.
UK Consumers Expect Inflation to Fall
Michael Field, chief European markets strategist at Morningstar, says UK investors are looking beyond the short-term data releases: “Equity market investors are certainly not panicking, with the FTSE 100 just off its all-time highs. This could be down to consumer sentiment, to which recent surveys showed that expectations of future inflation are falling, a good sign for the economy.”
Field continues: “There is still a chance that the Bank of England will raise interest rates before the end of the year, bringing them to 4% and potentially above in early 2027. Like consumers, though, investors are optimistic, with expectations that rates will decline again in the latter half of 2027.”
