Inflation is expected to turn higher
Higher household energy costs are set to push UK inflation back up, just as signs of slower growth sharpen the trade-off facing the Bank of England. Economists expect the Consumer Prices Index to rise to 2.9% in July, from 2.6% in June, a 15-month low. The Office for National Statistics is due to publish the figures on Wednesday, and the release will show whether the expected increase is concentrated in household energy or reflects pressure across a wider range of prices.
A rise in the headline rate would mark a reversal in the recent direction of travel, though one monthly reading can’t establish whether inflation is settling into a new pattern. The distinction matters: a price-cap adjustment can lift the annual measure even as other costs ease, while persistent increases across several categories would suggest a broader problem. The July figure will be a snapshot, not a verdict on the path ahead.
Energy bills drive the expected increase
Ofgem’s latest price cap allows the average household gas and electricity bill to increase by £221 a year, or 13%, to £1,862. Ellie Henderson, an economist at Investec, estimates that the rise alone will add 0.5 percentage points to July’s inflation reading. That estimate points to the direct effect of the cap on the headline measure; it doesn’t mean every household will see the same bill change, or that the full increase will be felt in the same way across household budgets.
“It was already clear at the publication of the June print that any easing in inflationary pressures as per the headline measure wouldn’t last for long,” Henderson said. She expects the cap increase to erase progress toward the Bank of England’s 2% inflation target. Her warning captures the awkward timing: a temporary dip in the annual rate can look like progress, then a scheduled change in a major household cost can reverse some of it quickly.
Lower motor fuel inflation should offset part of the energy shock, but the net effect is still likely to squeeze household budgets. RSM chief economist Thomas Pugh said the increase adds fresh pressure for families and complicates the interest rate outlook. For households, the arithmetic is immediate: more spent on energy leaves less room for other costs. For policymakers, the question is whether that pressure will feed into broader price-setting and spending decisions, or remain largely tied to the cap adjustment.
This is more significant than it looks. A higher headline rate can affect how people judge the cost of living, even when the rise comes from a specific bill category. But that does not by itself show that underlying inflation has accelerated. The details behind the headline will matter.
Food costs remain a risk
Food inflation may ease slightly in July as lower wholesale prices from late last year feed through to shops, Pugh said. He expects it to edge higher again later in the year. The lag between wholesale costs and supermarket prices means a fall in input prices doesn’t necessarily bring quick relief at the checkout; businesses may pass through changes over time, and the timing can vary.
Supply risks could limit that near-term relief. The Food and Drink Federation says heatwaves are affecting fruit, vegetable and grain supplies, with crop shortages likely to reach supermarket prices. Investec analysts warn that an El Niño weather event could add to upward pressure. These are risks to the expected easing, not proof that every affected product will rise by the same amount. Still, weather-related disruption can make food prices less predictable, particularly when several parts of the supply chain are exposed.
Earlier this year, industry figures warned that food inflation could reach as high as 10% this year as the Iran war’s effects spread through supply chains. That forecast puts the expected July dip in context: easing wholesale costs may offer only temporary relief if supply disruptions persist. The forecast is a warning about possible pressure, rather than a description of what July’s figures will show.
And this is the part most people overlook: food and energy prices affect household finances directly, but their movement doesn’t tell the whole story of inflation. A temporary fall in one category can coexist with renewed pressure in another. If you’re working in this space, the useful question is whether the cost increases stay confined to the items driving them or begin to show up more broadly.
Growth and policy face competing pressures
UK economic growth slowed to 0.4%, prompting economists to flag a possible slowdown as higher prices and borrowing costs linked to the Iran war filter through. The summer economy has also received a lift from heatwaves and the World Cup, but that boost may not last as household costs rise. The combination makes the outlook harder to read: activity can be supported by temporary factors even as households face less room to spend elsewhere.
The Great British Summer Savings Scheme, announced by former Chancellor Rachel Reeves, cuts VAT on family attractions and children’s meals until September. Economists expect the measure to weigh slightly on inflation, though not enough to prevent the headline rate from moving further above the Bank’s target. Its effect is also limited in scope and duration, so it’s unlikely to settle the wider question of whether price pressures are easing.
Victoria Scholar, head of investment at Interactive Investor, expects roughly one 25-basis-point rate increase by year-end. She said the Bank is likely to act to temper overheating risks and steer inflation back toward its target. That view sits alongside signs of slower growth, which complicate the policy choice: tighter monetary conditions can weigh on demand, while easing too soon could leave inflation above target for longer. No single July reading can resolve that tension.
What the July reading can tell us
With energy costs rising and food pressures still unresolved, the July reading will test whether June’s improvement marked lasting progress or a brief pause. The headline figure will draw attention, but its composition will matter just as much: the energy cap’s contribution, the direction of food prices, and any signs that cost changes are spreading across other categories. A rise driven mainly by the cap would carry a different message from one accompanied by broader price increases.
For now, the figures are expected to show renewed inflation alongside weaker growth. That combination leaves the Bank facing competing signals, while households have to absorb higher bills in the near term. The next reading won’t settle the debate. A closer look at the sources of inflation will be needed to judge whether the July increase is a short-lived interruption or evidence that progress toward the target has become less secure.