UK inflation has risen to 2.9% as higher energy prices put renewed pressure on household finances and move inflation further away from the Bank of England’s 2% target.
The latest figures from the Office for National Statistics (ONS) show that Consumer Prices Index (CPI) inflation increased from 2.6% in June to 2.9% in July. This marks the highest inflation rate since March and comes after a significant increase in the energy price cap.
Energy Prices Drive Inflation Higher
The main factor behind July’s increase was a sharp rise in gas prices following the latest change to the energy price cap.
The 13% increase in the cap pushed the average annual household energy bill up by around £221, taking it to approximately £1,862. The ONS said gas prices recorded their biggest increase in almost four years.
Other factors also contributed to the rise in inflation. Furniture prices fell by less than they normally do at this time of year, while clothing prices also recorded a smaller decline as retailers offered fewer discounts.
The rise in energy costs has added further pressure to households already dealing with higher living costs.
Inflation Moves Further From the 2% Target
The latest figures will be closely watched by the Bank of England, which has been attempting to bring inflation back towards its 2% target.
CPI inflation had fallen to 2.6% in June, its lowest level for 15 months, before rising again in July. Inflation including housing costs, known as CPIH, also increased from 2.8% to 3.1%.
There are concerns that inflation could remain elevated in the coming months, particularly if energy prices continue to rise.
The next energy price cap for October to December will be announced by Ofgem later this month. Forecasts from Cornwall Insight suggest that the average household bill could rise by a further 4%, potentially reaching around £1,941.
Middle East Conflict Adds to Energy Concerns
The ongoing conflict in the Middle East is another major concern for the UK economy.
Wholesale energy prices have been affected by uncertainty surrounding the conflict, with oil prices rising again after falling earlier in July.
The Strait of Hormuz is also a major factor. The important shipping route normally carries a significant proportion of the world’s oil and gas supplies, meaning continued disruption could put further pressure on global energy prices.
If energy costs remain high, households and businesses could face additional increases in their bills over the coming months.
Food Prices Could Also Come Under Pressure
Energy is not the only area causing concern. The UK’s recent hot and dry weather has affected agricultural production, raising concerns about future food prices.
Producers have warned that heatwaves and drought conditions across the UK and Europe have affected supplies of fruit, vegetables and grains.
The Food and Drink Federation has warned that reduced crop availability could eventually feed through to supermarket prices, potentially putting additional pressure on food inflation into 2027.
For households already dealing with higher energy costs, another increase in food prices could make the cost-of-living squeeze more difficult.
Government Under Pressure to Act
The latest inflation figures create another challenge for Prime Minister Andy Burnham and Chancellor John Healey as the Government attempts to reduce pressure on household budgets.
Burnham has pointed to the impact of the Middle East conflict on energy prices, arguing that the Government cannot control global events but can take measures to help households manage rising costs.
The Government has announced plans to remove VAT from electricity bills from October, while also reinstating a £2 cap on bus fares for 2027.
However, opposition politicians have criticised the Government’s economic policies and warned that further tax rises could add to financial pressures ahead of the October Budget.
Could Interest Rates Rise Again?
Higher inflation could also affect the Bank of England’s approach to interest rates.
Although the central bank has been gradually moving towards lower borrowing costs, persistent inflation could make further rate cuts more difficult.
Some economists have warned that interest rates could even increase later this year if inflation continues to move higher. The combination of expensive energy, rising food costs and continued pressure on household finances could make it harder for inflation to return to target.
For homeowners and property investors, this could be particularly important. Higher interest rates would increase borrowing costs and could put further pressure on mortgage affordability and property demand.
What This Means for Households and Property Investors
The return of higher inflation highlights the continued uncertainty facing the UK economy.
For households, rising energy and potentially food costs could reduce disposable income. For landlords and property investors, higher inflation can also create a mixed picture, with rising rents potentially providing some protection against increasing costs, while higher borrowing costs can reduce investment returns.
With the October Budget approaching, both households and investors will be watching closely to see how the Government responds to the latest inflation figures.
The direction of energy prices, interest rates and taxation could all have a significant impact on the property market over the remainder of 2026.
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