UK inflation jumps to 2.9% as energy cap reset fuels price rise

The latest figures from the Office for National Statistics show the consumer price index (CPI) rose to 2.9 per cent in the 12 months to July, up from 2.6 per cent the month before. The increase follows the recent reset of the energy price cap, which lifted household energy bills.

Core inflation, which strips out food and energy, settled at 2.6 per cent, while services inflation, a key gauge of wage pressure, eased to 3.4 per cent. The data suggest that the upward trend in price growth may be gathering momentum.

What the numbers reveal

Analysts point to a slower fall in furniture prices and a modest decline in clothing costs as contributors to the rise.

"Upward pressures included furniture prices falling by less than usual for this time of year, and also a smaller fall for clothing prices due to reduced discounting," said Mike Hardie, deputy director for prices at the ONS.

Raw material costs also slowed, reflecting a dip in crude oil and refined petroleum prices, but the overall trend remains upward as global tensions keep energy markets volatile.

Political and market reaction

Chancellor John Healey defended the resilience of the British economy, noting that the war in Iran has added to price pressures at home. He highlighted recent measures such as a cut to VAT on electricity and a cap on bus fares at £2 to ease household budgets.

Opposition leader Sir Mel Stride blamed the Conservative government’s legacy policies, arguing that inflation has now been above the 2 per cent target for 22 months. He warned that further tax hikes could exacerbate the cost‑of‑living squeeze.

Investment strategist Scott Gardner of J.P. Morgan Personal Investing said the Iran conflict is feeding through to everyday bills and that businesses are passing higher input costs onto consumers. "Falls in services inflation and shop prices are helping to offset some of these pressures for now, but the jury is out on whether this will last," he added.

On the bond market, 10‑year gilt yields rose to their highest level in nearly two decades, with new medium‑term issues offering a 5.155 per cent yield, the steepest since 2007. The surge reflects investor concern that the Bank of England may need to raise rates if oil‑related disruptions persist.

Outlook for rates and households

Economists at the Bank of England have warned that continued turbulence in Gulf oil trade could force a policy tightening. However, Felix Feather, an economist at Aberdeen, argued that markets remain largely calm, expecting only modest monetary tightening given the slowdown in domestically generated inflation and a soft labour market.

Higher borrowing costs could limit the government’s ability to fund further tax relief or spending aimed at easing the cost of living, putting additional strain on the administration of Andy Burnham in Manchester.

For a broader view of how geopolitical risks are shaping the UK economy, see the recent analysis on UK growth beats forecasts but war and tax clouds loom.

In the coming months, the key question will be whether inflation peaks soon enough to allow the Bank of England to hold rates steady, or whether persistent energy price shocks will push policymakers toward another hike, further tightening household budgets.