Inflation in the UK climbed to 2.9 per cent in the 12 months to July, from 2.6 per cent in June, the Office for National Statistics said on 19 August, after a 13 per cent increase in the Ofgem energy price cap pushed up gas and electricity bills. It is the highest reading since March.
VAT on domestic electricity bills falls from 5 per cent to zero from 1 October, and the government’s announcement of the cut on 21 July said: “Small businesses who qualify for the domestic energy VAT relief and are not registered for VAT, as well as charities and residential care homes eligible for the reduced rate will also benefit.” The announcement said the cut is expected to take around £45 off the yearly Ofgem price cap in October and is funded for this financial year.
What drove the July figure
The consumer prices index rose 0.3 per cent between June and July, compared with 0.1 per cent over the same period in 2025, according to the ONS bulletin. Housing and household services, and furniture, made the largest upward contributions to the change in the annual rate, while transport made the largest downward contribution, the ONS said.
Mike Hardie, deputy director for prices at the ONS, said: “Inflation rose in July, driven by a sharp increase in gas prices following this month’s change to the energy price cap. This was the largest rise in gas prices for almost four years.”
He added: “Other upward pressures included furniture prices falling by less than usual for this time of year, and also a smaller fall for clothing prices due to reduced discounting.”
The Ofgem cap rose to £1,862 in July, the first cap period to factor in higher global oil and gas prices resulting from the war with Iran, now close to its seventh month.
Food inflation slowed to 1.3 per cent in July from 1.7 per cent in June, its lowest rate in almost five years. Services inflation, which the Bank of England watches closely, eased to 3.4 per cent from 3.6 per cent, and core inflation, which strips out food and energy, held at 2.6 per cent. The goods rate rose from 1.7 per cent to 2.2 per cent, the ONS said.
Interest rates and the political response
The Bank of England is required to keep inflation at 2 per cent over the medium term. Bank rate has been held at 3.75 per cent since December, but investors think there is a chance of a rise before the end of the year, particularly if the Iran conflict flares up again.
Yael Selfin, chief economist at KPMG UK, said the data would not be “cause [for] significant concern for the Bank of England, with domestic price pressures still moderating and inflation broadly in line with its latest projections”.
John Healey, the chancellor, said the conflict in the Gulf “continues to impact prices here at home, but Britain’s economy is resilient”. He said he and the prime minister, Andy Burnham, had given families “breathing space” through the electricity VAT cut, which lasts six months.
Mel Stride, the shadow chancellor, said: “This will be a worry for families across the country. Labour’s tax rises and business bashing have driven the cost of living higher and higher, yet Andy Burnham refuses to rule out yet more tax hikes at the budget.”
Robert Jenrick, Reform’s Treasury spokesman, said: “Andy Burnham talks a big game but so far all his policies are doing is exploding people’s bills. The only way to cut the cost of living is to stop wasting money on foreign aid and benefits and spend it on working people instead.”
The July retail prices index is normally used to set the next annual rise in rail fares, although Rachel Reeves, the previous chancellor, announced in the November 2025 budget that fares would stay frozen until March 2027.
Long-term government borrowing costs came close to a post-1998 high on 18 August during a global bond sell-off. Separate data released days earlier showed private-sector pay growth at a six-year low, which analysts said made Bank action to tame inflation less likely.
