UK Inflation hits 18-month high, fueling debate over interest rates

UK inflation rose to its highest level in a year and a half in July, driven by sharp increases in fuel, food, and travel costs, putting pressure on the Bank of England (BoE) to slow down planned interest rate cuts.

According to the Office for National Statistics (ONS), consumer prices climbed 3.8% compared to the same month last year – up from 3.6% in June. This is the fastest rise since January 2024 and slightly above economists’ forecasts of 3.7%.

Services inflation, which reflects long-term price trends and is closely monitored by the BoE, also rose to 5%, beating the Bank’s forecast of 4.9%.

Economists say the rise could signal that inflation is proving more stubborn than expected. Raj Badiani of S&P Global Market Intelligence warned this could prompt BoE policymakers to argue that interest rates are being cut too quickly.

Despite the inflation jump, financial markets are still betting on another rate cut before the end of the year – though confidence in that outcome has weakened. The pound edged slightly higher after the data was released, trading around $1.35.

The surprise rise in inflation was largely due to a spike in airfares, which soared 30.2% from June to July – the biggest monthly jump since records began in 2001, likely linked to the timing of school holidays.

Food prices also continued to climb, with items like beef, chocolate, orange juice, and coffee pushing food and drink inflation to 4.9% – the fastest rate since February. Rising hotel and restaurant prices added to the pressure, increasing 3.2% annually.

This comes at a tricky time for the Labour government, as Prime Minister Keir Starmer faces criticism that rising costs are undermining his promises to improve living standards. Some blame the government’s recent tax and minimum wage hikes for fuelling price increases.

Chancellor Rachel Reeves acknowledged that more work is needed, despite progress in bringing inflation down from last year’s double-digit highs.

Economists at Bloomberg said the data broadly aligns with BoE expectations, but warned that any further unexpected rises in prices could delay future rate cuts. For now, all eyes are on the next two months of data ahead of the BoE’s next major decision in November.