UK inflation accelerated in July as a sharp increase in household energy bills brought a brief period of relief for British consumers to an end.
Consumer prices rose 2.9% year-on-year in July, up from a 15-month low of 2.6% in June, according to data released by the Office for National Statistics on Wednesday, August 19.
The figure was in line with the median forecast of economists surveyed by Bloomberg and slightly above the Bank of England’s previous forecast of 2.8%.
The increase was largely driven by a 13% rise in the household energy price cap, which determines the amount many consumers pay for electricity and gas.
The impact of higher energy costs was partly offset by lower motor fuel prices.
The latest increase pushed the overall inflation rate to its highest level since March, signalling renewed pressure on household finances after inflation had eased in recent months.
However, some underlying measures showed signs of moderation.
Services inflation, which is closely monitored by the Bank of England as an indicator of domestic price pressures, declined to 3.4% from 3.6% in June.
Core inflation, which excludes energy, food, alcohol and tobacco prices, remained unchanged at 2.6%.
The pound remained higher following the release of the inflation data, rising 0.1% to $1.3541, while gilt futures pointed to slightly lower bond yields at the market open.
The renewed increase in inflation comes as the UK government faces continued pressure to address the cost of living.
Prime Minister Andy Burnham has made living costs a central focus of his first month in office, introducing measures including a cap on bus fares and proposals to reduce value-added tax on energy bills.
However, a prolonged conflict between the United States and Iran could make the government’s efforts more difficult by keeping energy prices elevated.
The conflict has already contributed to higher global oil prices and increased concerns about energy supply disruptions, creating the potential for additional inflationary pressure.
For the Bank of England, sustained energy-related price increases could complicate the path for further interest-rate cuts.
A prolonged period of higher inflation could force policymakers to keep interest rates elevated for longer or, depending on the scale of the shock, consider raising rates to contain renewed price pressures.
The July figures therefore provide a fresh challenge for policymakers as they balance efforts to support economic growth against the need to prevent inflation from becoming entrenched.
