UK inflation rose more than expected in July, with rising food prices and higher airfares being the main contributors. This unexpected jump has raised fresh doubts about whether the Bank of England (BoE) will move ahead with interest rate cuts in the near future, as inflationary pressures remain stronger than many had anticipated.
According to figures from the Office for National Statistics (ONS), consumer prices increased by 3.8% in July compared to the same month last year. This was slightly higher than the 3.6% recorded in June and also above the 3.7% figure that economists had been forecasting. The data shows that inflationary pressures have not eased as much as the markets had hoped.
The Bank of England has previously suggested that inflation could climb further in the short term, potentially reaching 4% in the coming months, before gradually declining towards the 2% target by 2027. However, the July figures indicate that the journey back to target could take longer than expected, making it more difficult for policymakers to justify rate cuts soon.
One of the key areas of concern is services inflation, which picked up more sharply than expected. It rose from 4% to 5% in July, reflecting the higher costs businesses are currently facing. This measure is closely watched by the BoE because it tends to show underlying and persistent inflationary trends that are harder to bring down.
Marcus Jennings, fixed-income strategist at Schroders, noted that core inflation also beat market expectations. He explained that this development casts further doubt on the central bank’s ability to reduce rates in the short term. Jennings added that while the jump in airfares contributed significantly to July’s figures, this category is known for its volatility and could ease in the coming months.
Nonetheless, Jennings stressed that the bigger picture lies in the labour market. For the BoE to consider easing policy, signs of a weaker labour market are essential to counterbalance high inflation. The surprise increase in July only reinforces the need for further evidence of slowing wage growth and hiring before rate cuts can be justified.
The latest numbers leave the BoE in a difficult position. Policymakers now face the challenge of deciding whether the risks of keeping rates high outweigh the risks of loosening policy too early. On one hand, keeping rates elevated helps to curb inflation; on the other hand, higher borrowing costs weigh on households and businesses at a time when economic growth is already slowing.
The economy has shown signs of losing momentum. Gross domestic product (GDP) grew by only 0.3% in the three months leading up to June, compared to 0.7% growth in the first quarter of the year. This slowdown suggests that businesses and households are already feeling the squeeze from tighter financial conditions.
Suren Thiru, economics director at ICAEW, argued that July’s inflation figure has likely put an end to hopes for a September interest rate cut. He also suggested that the persistence of underlying inflationary pressures makes it less likely that the BoE will loosen monetary policy at any point before the end of the year.
Other economists share similar concerns. Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, warned that inflation is unlikely to return to target any time soon. He expects inflation to remain above 3% until at least April 2026, which would keep the Monetary Policy Committee (MPC) from lowering rates further in the near term.
Andrew Wishart of Berenberg pointed out that global food prices and energy costs are still exerting upward pressure on inflation. He believes that this effect will peak in the third quarter of the year, but in the meantime, it will be enough to keep inflation high and prevent the BoE from making additional cuts in 2025.
Wishart added that services inflation alone, which stood at 5% in July, would be enough to hold headline inflation at 2.5% even if all other prices stopped rising. However, he also noted some early signs that businesses are losing pricing power and that wage growth may be starting to slow. These factors could help bring down services inflation gradually in 2026, opening the door for modest rate cuts later on.
Looking further ahead, Berenberg predicts that the BoE could reduce interest rates twice in the first half of 2026, potentially bringing the base rate down to 3.5%. But for the rest of 2025, policymakers are expected to remain cautious and keep rates on hold.
Market traders are also adjusting their expectations. Current swap market pricing suggests there is roughly a 50% chance of another quarter-point rate cut this year, but no certainty. Investors remain divided over whether the BoE will take action before year-end.
Monica George Michail, associate economist at NIESR, said the BoE is walking a fine line between reducing inflation and supporting the slowing economy. She pointed out that some of the drivers of recent price increases, such as policy changes, may prove temporary. For this reason, the Bank may still consider one more cut before the end of 2025.
However, she cautioned that risks remain tilted to the upside. Rising food costs and persistent wage growth could keep inflation higher for longer, forcing the BoE to remain careful in its approach.
The Bank of England is set to make its next interest rate decision on 18 September. The July inflation figures will no doubt play a central role in shaping that outcome, as policymakers weigh the competing pressures of inflation control and economic stability.
Download NOW
4 Simple Steps To Becoming Wealthy Through Property