UK inflation rose to 3.1% in the 12 months leading to July, driven by soaring energy costs and a reset of the energy price cap, according to official data released by the Office for National Statistics (ONS). The reading marks an acceleration from the previous rate of 2.9 per cent and sets the stage for a critical interest rate decision by the Bank of England.
Energy Price Cap Reset Drives Consumer Price Index Up
Mike Hardie, deputy director for prices at the ONS, stated that upward pressures included furniture prices falling by smaller margins than usual for the time of year, alongside smaller reductions in clothing prices due to reduced discounting. Conversely, Hardie noted that the prices of raw materials and goods leaving factories slowed down, driven by drops in crude oil and refined petroleum.
Additional sector data showed that services inflation—closely watched by Bank of England policymakers as an indicator of domestic wage pressures—eased.
Political and Market Reactions to the Inflation Jump
Chancellor John Healey maintained that Britain’s economy remains resilient despite international headwinds such as the Iran war impacting prices at home, pointing to government cost-of-living measures. Shadow Chancellor Sir Mel Stride offered a contrasting assessment, stating that price rises are accelerating and pointing out that inflation has remained above the two per cent target for 22 months in a row.
Gardner noted that businesses face higher input prices that are being passed on to buyers, creating further risks as colder months approach.
Bank of England Outlook and Gilt Market Response
Traders and economists remain divided on whether the Bank of England will leave interest rates on hold during its Thursday policy meeting or choose to hike rates to combat persistent price growth. Felix Feather, an economist at Aberdeen, observed that markets remain largely undisturbed by the higher inflation print and continue to price in modest monetary policy tightening.
Ahead of the central bank’s announcement, UK borrowing costs reached near-two-decade highs. On Tuesday, 10-year gilt yields hit a near-two-decade high as the government sold medium-term bonds, marking the highest interest rate on such debt since 2007 amid heightened trader anxiety over potential interest rate hikes.