UK inflation climbed faster than expected in July, hitting 3.8% year-on-year, according to data from the Office for National Statistics (ONS). Economists had forecast a smaller rise to 3.7%, following June’s 3.6% reading.
Core inflation, which strips out volatile items such as food and energy, also reached 3.8%, up from 3.7% in June, marking the highest annual rate since early 2024.
ONS chief economist Grant Fitzner pointed to a sharp jump in airfares—the largest July increase since 2001—alongside higher fuel prices and ongoing food cost pressures as key drivers. Items including coffee, orange juice, meat, and chocolate saw some of the steepest rises.
Services inflation accelerated to 5% from 4.7% in June, raising concerns for the Bank of England as wage growth and higher National Insurance contributions continue to feed through to business costs.
The pound was little changed against the US dollar after the release, trading near $1.3489.
Chancellor Rachel Reeves acknowledged progress from last year’s double-digit inflation but said more work was needed to ease household pressures. Analysts, however, warned that sticky services inflation could delay further monetary easing.
“I’m annoyed about the services inflation—it’s looking sticky,” said James Sproule, chief UK economist at Handelsbanken. “The chance of a rate cut in November is vanishingly small.”
Earlier this month, the Bank of England cut rates by 25 basis points to 4%, but only after a narrow 5–4 vote. Policymakers face a delicate balance between cooling inflation, a softer jobs market, and modest GDP growth, which expanded by 0.3% in Q2.
Looking ahead, the BOE expects inflation to peak near 4% in September before gradually easing through 2026. Deutsche Bank forecasts CPI at 3.5% by the end of 2025 and around 2.25% by late 2026, but warned that upside risks to price pressures remain.
