The rise had been widely expected after Ofgem increased its household energy price cap by 13% from 1 July. The change added £221 to a typical annual gas and electricity bill, taking it to £1,862, as higher wholesale energy costs linked to the conflict involving Iran fed through to consumers.
According to the Office for National Statistics, July’s increase was driven largely by a sharp rise in gas prices following the new energy price cap. Mike Hardie, the ONS deputy director for prices, said it represented the largest increase in gas prices for almost four years.
Energy Costs Drive the Rise While Underlying Pressures Remain Softer
Energy was the main contributor to July’s stronger inflation reading, while some measures of underlying price pressure showed less movement. Core inflation, which excludes energy and food, remained unchanged at 2.6%.
Services inflation also eased, falling from 3.6% in June to 3.4% in July. The Guardian reported that economists viewed the softer labour market as a factor that could limit the risk of higher inflation becoming more persistent. Other categories also added upward pressure. According to the ONS, furniture prices fell by less than they normally do at this time of year, while clothing prices recorded a smaller seasonal decline because retailers offered fewer discounts.
At the same time, some price pressures moderated elsewhere. Prices paid for raw materials and goods leaving factories slowed, helped by lower crude oil and refined petroleum prices. Food and drink inflation also fell from 1.7% in June to 1.3% in July. There were sharp differences within food categories. Fish prices increased by 13.6% over the year and fruit by 8.1%, while pizza prices fell by 8.5% and butter prices dropped by 5.3%.
Attention Turns to Interest Rates, Food Prices and Future Energy Bills
The latest inflation figure has increased attention on the Bank of England, although several economists did not expect July’s reading alone to lead to an immediate rise in interest rates.
According to KPMG chief economist Yael Selfin, inflation is expected to continue rising in the coming months, with energy-related costs contributing to the increase. She said the outlook remained strongly dependent on developments in Iran and their effect on global energy prices.
The Bank of England kept interest rates unchanged at 3.75% in July. GB News reported that Professor Joe Nellis of MHA said rates could remain at that level for the rest of 2026 if inflation stayed near 3%, although a move towards 4% could increase pressure on policymakers to raise borrowing costs.
Food prices are another area being closely watched. Producers have warned that high temperatures and drought across the UK and Europe could affect agricultural output and costs. The BBC also reported that Cornwall Insight expects household energy bills to rise again from October, with uncertainty surrounding the US-Iran conflict and disruption around the Strait of Hormuz continuing to affect wholesale markets.
For households, July’s figures show a renewed rise in the headline inflation rate even as food inflation and some underlying measures have eased. The next decisions on interest rates and energy costs will be made against a backdrop of weaker job vacancies, slower wage growth and continuing volatility in global energy markets.
