UK inflation jumped to 2.9 per cent in July, dealing households a fresh blow after the energy price cap pushed average annual bills up by £221.
The rate climbed from 2.6 per cent in June and moved further above the Bank of England’s two per cent target.
The increase had been widely expected, with the FactSet consensus forecasting that inflation would rise from 2.6 per cent in June to 2.9 per cent in July.
Economists had identified the 13 per cent rise in Ofgem’s energy price cap, which took effect on July 1, as the main driver.
The change pushed the typical annual gas and electricity bill up by £221 to £1,862, allowing higher wholesale energy costs following the outbreak of the Iran war to feed more directly into household bills.
Before the cap was reset, consumers had been partly shielded from the full impact of those higher costs.
July’s figure was the highest rate of CPI inflation since March and moved inflation further above the Bank of England’s two per cent target.
Joe Nellis, emeritus professor and head of economic research at MHA, warned that inflation was “moving back in the wrong direction” and was likely to rise further during the second half of 2026.
He explained the increase would be a setback for Prime Minister Andy Burnham, particularly because rising prices disproportionately affect lower-income households.
The Bank of England expects inflation to average around 3.2 per cent in the final quarter of the year.
Mr Nellis suggested interest rates could remain at 3.75 per cent for the rest of 2026 if inflation stays close to three per cent. However, he warned that if inflation moves towards four per cent, the Bank could be “forced to raise interest rates”, despite the economy already being expected to slow.
He added that the latest rise creates an “uncomfortable Autumn Budget” for the Prime Minister and Chancellor, who must support growth and struggling households without adding further inflationary pressure.
Mr Nellis said the current spike should be temporary, but warned it could become structural if it begins to influence expectations, wages and prices.
Charlie Ambler, co-chief investment officer and partner at Saltus, had said a rise to 2.9 per cent would reverse “the relief provided by the 2.6 per cent reading in June”.
He described the expected increase as “largely driven by rising energy costs”.
Despite the expected rise in headline inflation, markets had widely anticipated that the Bank of England would leave interest rates unchanged at its September meeting.
Mr Ambler said monetary policy “remains finely balanced”, but described the possibility of an increase in September as “remote”.
He added: “We think a single increase to 4 per cent by the end of the year is more realistic, as energy-driven inflation is very different in character from demand-driven inflation and the Bank will likely want to keep its options open.”
The Bank of England had kept interest rates unchanged throughout 2026.
For savers, the prospect of rising inflation carries practical implications. Harriet Guevara, chief savings officer at Nottingham Building Society, warned: “Even small increases can erode the spending power of cash over time, so it is worth checking that savings are held in an account paying a competitive rate and that the account still matches the level of access needed.”
She recommended dividing savings according to different objectives. “Easy-access accounts may suit an emergency fund or short-term plans, while fixed-rate accounts can provide more reassurance for money you will not need straight away – and are particularly competitive at the moment for those able to lock money away.”
Ms Guevara also highlighted the importance of tax efficiency, noting that Cash ISAs may help savers retain more of their interest depending on individual circumstances.
Ambler urged investors to consider the implications of a shifting rate environment.
“Portfolios built for a falling rate environment will need to adapt, particularly in rate sensitive areas like gilts and domestically focused equities,” he said.
He stressed, however, that the nature of the current inflationary pressure matters.
Energy-driven price rises differ fundamentally from those caused by excess demand, a distinction the Bank of England is likely to weigh carefully in its policy decisions.
Looking beyond the near-term volatility, Ambler counselled a focus on resilience.
“Long term returns are driven by maintaining diversified exposure to quality assets, and investors should not lose sight of the need to prioritise quality and resilience,” he said.