Britain's annual inflation rate accelerated to 2.9% in July, up from 2.6% in June, according to figures released Wednesday by the Office for National Statistics. The rise, which matched analyst forecasts, was largely attributed to a 13% surge in the household energy price cap, itself a consequence of heightened tensions in the Middle East.
The ONS described the jump in gas prices as the largest in nearly four years, underscoring the persistent pressure on European households from energy markets still reeling from geopolitical shocks.
Services inflation drives the increase
Unlike recent months, the July uptick was driven primarily by services inflation rather than goods. Rents for housing rose 4.1% year-on-year, up from 3.4% in June, while internet services inflation climbed 12.1%. Car insurance costs increased 8.4%, mobile phone services 9%, and there were notable rises in care home fees, dental care, education, childcare, and sports participation.
Jonathan Raymond, investment manager at Quilter Cheviot, noted that the renewed spike had been anticipated. "A renewed spike in inflation has been expected as the war in the Middle East continues to navigate a clunky ceasefire. Things remain far from normal in the Strait of Hormuz and look unlikely to be resolved any time soon, meaning pressure is likely to remain on prices for the remainder of the year at least," he said in an email note.
Raymond added that inflation should moderate in the coming months as government measures begin to feed through. "Cuts to VAT on energy bills and discounted leisure and hospitality offerings will begin to feed through in official numbers, but unlikely at the pace needed by the Bank of England to feel to start considering rate cuts."
Sarah Coles, head of personal finance at AJ Bell, explained that service industries are particularly exposed to wage costs. "Service industries are often labour intensive and rely on large numbers of staff earning the minimum wage, such as in care homes, hospitality and childcare. It means that as the minimum wage rises, so do costs. This has been exacerbated by rising employers' National Insurance, so service industries have been passing at least some of these costs on," she said.
Coles also pointed to sector-specific pressures. "Rents are up in part because mortgage rates have risen and legislation has become more onerous for landlords, which is being passed on to tenants," she noted. Childcare costs have risen partly due to soaring demand from the roll-out of freelance childcare, while government funding does not cover all costs, leaving paid-for providers to bridge the gap.
Food prices fall, but broader concerns remain
In contrast, food inflation eased to 1.3%, with price reductions for items such as pizza, quiche, butter, jam, and honey. Clothing, shoes, garden furniture, and televisions also saw price drops.
The UK's experience mirrors broader European trends. Spain's inflation reached 3.6% in July, its highest in over a year, as energy costs continue to ripple across the continent. Meanwhile, European bond yields have soared as Iran tensions stoke inflation worries, adding to the pressure on central banks.
For British households, the energy price cap rise is a stark reminder of the fragility of the recovery. The cap, which limits what suppliers can charge per unit of energy, rose by 13% in July, directly hitting millions of homes. The increase is largely a result of higher wholesale gas prices, exacerbated by disruptions in the Strait of Hormuz, a critical shipping lane for liquefied natural gas.
Analysts warn that the situation could persist. "The Middle East conflict shows no signs of abating, and the Strait of Hormuz remains a flashpoint," said Raymond. "This means energy prices are likely to stay elevated for the rest of the year, keeping inflation above the Bank of England's 2% target."
The Bank of England, which has been grappling with sticky inflation, is now facing a delicate balancing act. While services inflation remains stubborn, the government's temporary VAT cuts on energy and discounted leisure offerings may provide some relief in the autumn. However, as Raymond noted, these measures may not be enough to prompt rate cuts anytime soon.
For now, British consumers are feeling the pinch, with energy bills and services costs rising even as food prices moderate. The coming months will test whether the government's interventions can ease the burden without derailing the broader disinflationary trend.
