UK inflation is projected to increase to 2.9% in July, up from 2.6% in June, driven primarily by soaring energy bills, according to forecasts ahead of official data due on Wednesday. The anticipated rise follows a 13% increase in the energy price cap set by Ofgem, which raised the average annual gas and electricity bill by £221 to £1,862.
Key Details
Economists warn that this surge in energy costs could further complicate the economic landscape, as the ongoing conflict in Iran continues to exert pressure on global energy markets. Thomas Pugh, chief economist at RSM UK, noted that the energy price hike is expected to contribute approximately 0.44 percentage points to the inflation rate. However, a decline in petrol and diesel prices may partially offset this increase.
The Bank of England is reportedly considering raising interest rates from 3.75% to 4% by the end of the year in response to these inflationary pressures. Victoria Scholar, head of investment at Interactive Investor, indicated that inflation could peak above 3% later this year, further straining household budgets. She stated, "The Bank of England is likely to carry out roughly one 25 basis point hike by the end of the year as it looks to temper the risk of overheating."
Background
The broader economic context shows that the UK economy has been more resilient than previously anticipated, growing at the fastest pace in the G7 during the first half of 2026. However, the renewed cost of living crisis poses significant challenges for households and the government ahead of a difficult autumn budget, as highlighted by the upcoming figures from the Office for National Statistics (ONS).
Related coverage: UK GDP Grows 0.4% Amid Iran War Energy Price Pressures, Oil Prices Surge as U.S. Stocks Slip Ahead of Inflation Data.
Higher energy prices are likely to drive up inflation expectations, impacting consumer spending and potentially leading to a rise in interest rates. This could affect sectors sensitive to interest rate changes, such as housing and consumer goods. Watch for the official inflation data release on Wednesday, which will provide further clarity on the economic outlook.
Based on reporting by: standard.co.uk, theguardian.com