UK inflation climbed to 2.9% in July, up from a 15-month low of 2.6% in June, marking its highest level in four months. This increase was largely attributed to surging energy bills, specifically a 13% hike in Ofgem's energy price cap that took effect on July 1st, adding £221 a year to typical household bills. This surge in gas prices was the sharpest in almost four years, stemming from the US-Israel war with Iran restricting global oil supplies.
Despite the overall rise, core inflation, which excludes energy and food costs, remained steady at 2.6%. Food inflation, however, slowed to 1.3% in July, its lowest rate in nearly five years, with prices for items like pasta, olive oil, and fresh fruit falling due to strong competition among grocers. Conversely, non-food inflation remained steady at 0.1% in March after a 0.1% decline in February.
Analysts generally believe this inflation figure is unlikely to prompt the Bank of England to change its key interest rate at its next meeting in September, as inflation remains above the Bank's 2% target. KPMG's chief economist Yael Selfin expects inflation to continue rising, potentially peaking at about 3.5% by year-end, contingent on the evolving conflict in Iran. However, Ruth Gregory, chief economist of Capital Economics, anticipates inflation will fall to the target by the end of next year if energy prices do not rise significantly further. The Bank of England is forecast to keep rates at 3.75% this year and cut them to 3% next year. Chancellor John Healey acknowledged the impact of the Iran war on prices but highlighted measures like cutting VAT on electricity bills and capping bus fares to £2 to support households.
