UK inflation has increased to 3.8% in the year to July, up from 3.6% in June, the Office for National Statistics reveals.
Transport, particularly air fares, made the largest upward contribution to the monthly change, setting the cost of living at its highest since January 2024.
Meanwhile, housing and household services, particularly owner occupiers’ housing costs, made a large, partially offsetting, downward contribution to the Consumer Prices Index including owner occupiers’ housing costs (CPIH).
The latest inflation figure is still above the Bank of England’s 2% inflation target.
The German investment bank forecasts mortgage interest payments will rise by 30bps month-on-month, while energy and food prices will remain high for some months yet.
This chimes with comments from the BoE’s governor after the Monetary Policy Committee cut the base rate by a quarter point to 4% last week, its lowest level since March 2023.
Andrew Bailey, who voted to cut, said: “We think inflation will increase to around 4% in September.”
But the governor added that he expected that slowing pay growth would feed through to slower price rises in the key services sector.
Bailey pointed out: “Our job is to ensure that inflation falls back to the 2% target once these temporary factors have passed, as we expect to see.”
Commenting on today’s announcement, L&C Mortgages associate director David Hollingworth says that while it was widely expected that inflation would increase, the latest figures have “edged higher than anticipated”, which is a “blow for those hoping for further base rate cuts and could signal that rates will remain higher for longer”.
Hollingworth states: “There was hope that there could be another rate cut this year to follow the latest reduction to 4.0% this month. However, that was a much tighter call with a 5-4 split in the voting. Those preferring a hold in base rate may only reaffirm their view in light of today’s figures.”
“Mortgage borrowers have been enjoying a market where rates have been dropping. Fixed rates have been pricing in the recent and future cuts, so have been edging down with a host of deals now below 4%.”
“Those reductions have tended to come in small increments, but we could see that slow further or even reverse in some cases if the market reacts badly to the threat of higher inflation than was previously expected.”
Just Mortgages chief executive John Phillips comments: “Another rise in monthly inflation takes us one step closer to 4% – double the bank’s illusive target and where their long-term forecasts suggest inflation will peak.”
“While you can say that inflation is currently playing out according to the bank’s plan, it still remains ultra sticky, highly unpredictable and totally susceptible to both internal and external economic shocks.”
“It likely explains why the recent interest rate cut was such a knife-edge decision, and yet so necessary to give some form of support to a struggling economy.”
“While that 5-4 verdict likely irked many investors and economists, we remain hopeful for at least one more base rate cut this year – although this is totally reliant on how inflation plays out and how much fight the UK economy has left in it.”
Also weighing in, Bestinvest by Evelyn Partners personal finance analyst Alice Haine suggests July’s rise in inflation delivers “another blow to cash-strapped households already grappling with rising prices”.
Haine adds: “This is unlikely to be the news Chancellor Rachel Reeves wants to hear, as she looks towards her second Autumn Budget, with speculation mounting over which taxes she may target to plug the hole black in the public finances.”
