UK inflation hits four-month high as energy bills reignite interest-rate risk

UK inflation accelerated in July as a sharp rise in household energy costs pushed the headline rate further above the Bank of England’s target, reviving questions over whether policymakers may eventually need to raise borrowing costs again.

The Consumer Prices Index rose 2.9% from a year earlier, up from 2.6% in June and matching economists’ expectations. The increase took inflation to its highest level since March.

The latest numbers underline how quickly Britain’s inflation picture has shifted.

Price pressures had been easing earlier in the year, but higher energy costs linked to the Middle East conflict have now begun feeding more visibly into household bills.

Energy bills drive the July rebound

The biggest pressure came from domestic energy. Ofgem raised its price cap by 13% from 1 July after wholesale gas prices increased because of the Middle East conflict.

Gas costs have taken the bigger hit.

Ofgem said gas bills under the cap increased by about 24%, compared with roughly 5% for electricity.

Its published typical annual bill measure rose to £1,862 from £1,641 under the previous consumption benchmark.

That matters for the Bank because monetary policy cannot prevent the initial jump in imported energy prices.

The bigger concern is whether those costs begin feeding into wages, services prices and inflation expectations, turning an external shock into more persistent domestic inflation.

The Bank of England faces a harder rate call

The Bank kept its policy rate at 3.75% in July by a 6-3 vote, with three Monetary Policy Committee members favouring an increase.

It has warned that inflation is likely to move above 3% later this year as higher energy costs work through the economy.

The July reading therefore keeps another rate increase in play, even if it does not settle the debate.

The Bank must weigh the risk of inflation becoming entrenched against signs that underlying domestic demand and the labour market are losing momentum.

That tension has become sharper because the latest inflation increase is largely energy-driven rather than evidence of a broad resurgence in price pressures.

Economists still broadly expect the Bank to remain cautious unless higher energy costs begin generating stronger second-round effects.

A cooling labour market may restrain the Bank

Fresh employment figures released on Tuesday gave policymakers a reason to wait.

UK unemployment stood at 4.9% in the three months to June, while vacancies declined to 707,000 in the three months to July.

Private-sector regular pay growth slowed to 2.8%, the weakest pace since 2020. Public-sector wage growth remained much stronger at 6.1%, partly because of the timing of NHS pay awards.

Those numbers complicate the case for an immediate rate increase.

A softer jobs market should gradually reduce domestically generated inflation, even as households face another squeeze from energy.

For consumers, however, the immediate picture is less comfortable. Inflation is moving further away from the Bank’s 2% target just as utility costs rise again.

The next few months will determine whether July proves to be a temporary energy-driven setback or the start of a more persistent inflation problem.