UK Inflation Edges Higher In July But Not Seen Altering Interest Rate Perceptions
- Headline CPI rises to 2.9%, higher gas prices lift inflation - Core CPI holds at 2.6% as food pressures continue to ease - Producer prices slow sharply as oil costs fall - Softer wage growth reinforces case for BoE rate hold
LONDON – UK inflation rose for the first time on an annual basis since March in July, but there was little in Wednesday’s data to materially alter the outlook for Bank of England policy. While higher energy costs pushed the headline rate up, underlying price pressures remained relatively contained.
Headline CPI inflation rose in line with expectations to 2.9% y/y in July, three tenths above June. Prices increased 0.3% m/m, also matching forecasts and accelerating from 0.1% previously. Core CPI was unchanged at 2.6% y/y, although that was a tenth above consensus.
The Office for National Statistics said housing and household services, alongside furniture and household goods, made the largest upward contributions to the change in the annual inflation rate.
Transport provided the largest offset as motor fuel prices fell. Diesel prices declined by 8.8 pence per litre over the month, while petrol dropped 3.1 pence.
Mike Hardie, ONS deputy director for prices, said inflation had risen in July largely because of a sharp increase in gas prices following the latest change to the energy price cap, marking the largest rise in gas prices for almost four years.
Broader price pressures remain subdued
Source: Office for National Statistics
Despite the rise in headline inflation, economists said there was little evidence of a broader price increase.
Ruth Gregory, deputy chief UK economist at Capital Economics, noted that food and drink inflation fell for a fourth consecutive month to 1.3%, from 1.7%, its lowest rate since August 2024. She added that while sea transport inflation accelerated to 7.1% from 5.7%, air fare inflation dropped sharply to -11.6% from 3.1%.
Factory gate costs cool
Pipeline inflation data released alongside CPI also showed both input and output producer price inflation slowing in the year to July.
Input prices rose 4.9% y/y, well below the 6.5% forecast and sharply slower than the upwardly revised 7.4% increase recorded in June. On the month, input prices fell 1.7%, following a revised 1.9% decline previously.
Output prices increased 3.1% y/y, a tenth below consensus and four tenths slower than in June. On the month, prices rose an expected 0.2%, rebounding from a 0.1% decline.
The ONS said the slowdown reflected falling prices for crude oil and refined petroleum.
James Smith, a developed markets economist for ING, commenting on the figures, said that the overall message is that “There’s scant evidence so far – beyond energy prices – that the war in Iran is having a tangible impact on inflation. It is very early days, admittedly.”
Supporting data suggest stable rates
On Tuesday, the ONS published its latest Labour Force Survey. It showed that employment slowed to 84,000 3M/3M in June from 130,00 expected and 148,000 last.
Average weekly earnings increased 4.1% in June, slowing from a revised 4.4% last month. The earnings excluding bonuses measure was left unchanged at 3.4%, a tenth point below estimates.
ING’s Smith said his bank currently expects headline inflation to peak around 3.2% into next winter, on the assumption that food inflation does start to pick up a bit. “But that’s well below the 4% level, which we think is the threshold for the Bank to seriously consider rate hikes.”
Capital Economics’ Gregory concluded that today’s release, coupled with falling private-sector wage growth, suggested that domestically generated inflation remains contained. “We remain content with our view that provided energy prices don’t rise much further, CPI inflation will fall to 2.0% by the end of next year, and the Bank of England will keep rates at 3.75% this year and cut them to 3.00% next year.”
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- Headline CPI rises to 2.9%, higher gas prices lift inflation
- Core CPI holds at 2.6% as food pressures continue to ease
- Producer prices slow sharply as oil costs fall
- Softer wage growth reinforces case for BoE rate hold
By Harry Daniels
LiveSquawk News
@HarryDaniels71
12:00 GMT | 19 August 2026
LONDON – UK inflation rose for the first time on an annual basis since March in July, but there was little in Wednesday’s data to materially alter the outlook for Bank of England policy. While higher energy costs pushed the headline rate up, underlying price pressures remained relatively contained.
Headline CPI inflation rose in line with expectations to 2.9% y/y in July, three tenths above June. Prices increased 0.3% m/m, also matching forecasts and accelerating from 0.1% previously. Core CPI was unchanged at 2.6% y/y, although that was a tenth above consensus.
The Office for National Statistics said housing and household services, alongside furniture and household goods, made the largest upward contributions to the change in the annual inflation rate.
Transport provided the largest offset as motor fuel prices fell. Diesel prices declined by 8.8 pence per litre over the month, while petrol dropped 3.1 pence.
Mike Hardie, ONS deputy director for prices, said inflation had risen in July largely because of a sharp increase in gas prices following the latest change to the energy price cap, marking the largest rise in gas prices for almost four years.
Despite the rise in headline inflation, economists said there was little evidence of a broader price increase.
Ruth Gregory, deputy chief UK economist at Capital Economics, noted that food and drink inflation fell for a fourth consecutive month to 1.3%, from 1.7%, its lowest rate since August 2024. She added that while sea transport inflation accelerated to 7.1% from 5.7%, air fare inflation dropped sharply to -11.6% from 3.1%.
Pipeline inflation data released alongside CPI also showed both input and output producer price inflation slowing in the year to July.
Input prices rose 4.9% y/y, well below the 6.5% forecast and sharply slower than the upwardly revised 7.4% increase recorded in June. On the month, input prices fell 1.7%, following a revised 1.9% decline previously.
Output prices increased 3.1% y/y, a tenth below consensus and four tenths slower than in June. On the month, prices rose an expected 0.2%, rebounding from a 0.1% decline.
The ONS said the slowdown reflected falling prices for crude oil and refined petroleum.
James Smith, a developed markets economist for ING, commenting on the figures, said that the overall message is that “There’s scant evidence so far – beyond energy prices – that the war in Iran is having a tangible impact on inflation. It is very early days, admittedly.”
On Tuesday, the ONS published its latest Labour Force Survey. It showed that employment slowed to 84,000 3M/3M in June from 130,00 expected and 148,000 last.
Average weekly earnings increased 4.1% in June, slowing from a revised 4.4% last month. The earnings excluding bonuses measure was left unchanged at 3.4%, a tenth point below estimates.
ING’s Smith said his bank currently expects headline inflation to peak around 3.2% into next winter, on the assumption that food inflation does start to pick up a bit. “But that’s well below the 4% level, which we think is the threshold for the Bank to seriously consider rate hikes.”
Capital Economics’ Gregory concluded that today’s release, coupled with falling private-sector wage growth, suggested that domestically generated inflation remains contained. “We remain content with our view that provided energy prices don’t rise much further, CPI inflation will fall to 2.0% by the end of next year, and the Bank of England will keep rates at 3.75% this year and cut them to 3.00% next year.”