UK inflation in the 12 months to July jumped more than expected to 3.8%, up from June’s figure of 3.6%, as many forecasters expect inflation to keep rising over the coming months.
July’s hike in inflation came largely from the transport sector, with costs rising by 3.2% year on year and 1.7% since last month, according to the Office for National Statistics (ONS).
The rise was predominantly from airfares, with high demand for holiday travel meaning that July was probably not the best time to book flights. Airfares jumped in price by 30.2% month on month – the largest July increase since records began in 2001.
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Looking ahead, the headline figure of inflation (as measured by the Consumer Prices Index) is expected to swell in the autumn and remain above the 2% target into 2026.
The Bank of England said in its latest Monetary Policy Report that it expects inflation to peak at 4% in September before starting to fall closer to target.
In the Bank’s February outlook, it projected inflation would peak at 3.7%. The central bank now has a more pessimistic view.
This upwards revision is due to myriad factors. Higher-than-expected food prices are among them, according to the Bank’s report, as well as uncertainty from global developments – including changes in global trade resulting from US president Donald Trump’s tariff regime.
As for the rest of the year after inflation’s expected peak in September, the central bank expects that price growth will fall back down to 3.6% by the end of 2025.
When will inflation come down?
Amid dreary inflation forecasts, there is, thankfully, a light at the end of the tunnel.
Many forecasters think that inflation will fall after the September peak, and most expect inflation to fall closer to the 2% target over the course of 2026, though they are divided over whether inflation of 2% will actually be reached by the end of next year.
The Bank of England, for example, has said since February it expects inflation to fall towards the 2% target in 2026, and maintains this position.
Its latest forecast is that inflation will be 2.7% one year from now, in the third quarter of 2026.
Meanwhile, global economics consultancy Oxford Economics forecasts inflation to average 3.5% this year and 2.8% in 2026.
Edward Allenby, economist at Oxford Economics, said he expects “headline inflation to climb to 4% over the next couple of months, peaking in September”.
He added: “Thereafter, we expect inflation to drift lower, with the contribution from the energy and food categories likely to fall in the final months of this year and through 2026. Though services inflation will remain sticky in the near term, it should start to cool steadily next year.”
Both of these expectations are slightly higher than the average figures among forecasters surveyed by the Treasury on 20 August, who expect inflation in the fourth quarter of 2025 to be 3.4%.
The average expectation for inflation in the fourth quarter of 2026 is 2.2% among the same forecasters.
However, while all these predictions point to a fall in inflation over the remainder of 2025 and into 2026, a return to the 2% target still seems some way off.
What’s the link between inflation and interest rates?
Inflation rising above the 2% target is always a cause for concern for economists, policymakers and consumers.
The Bank of England is particularly concerned about inflation figures as it is the one of the jobs of monetary policy to guide and control inflation so prices do not spiral out of control.
This is largely done through influencing interest rates, which are typically raised to fight inflation.
Broadly speaking, the payoff to fighting inflation with higher interest rates is reduced economic activity. When interest rates are high, people have to use more of their earnings on expenses like their mortgage and are incentivised to save their cash as savings rates tend to be higher.
However, despite inflation being forecast to remain high this year, the Bank of England has been gradually cutting rates since the summer of 2024.
Will high inflation stop further interest rate cuts?
August’s base rate decision saw interest rates fall by another 25 basis points to 4%, marking the fifth cut since July 2024.
However, members of the Bank’s Monetary Policy Committee (MPC) were more divided in their latest meeting than they were previously.
In August’s meeting, the motion to lower the base rate by 25 basis points was passed by five to four, and involved two rounds of voting. For contrast, the MPC voted for a base rate cut in February with seven in favour and just two against.
One reason for this is that high inflation readings are making base rate cuts harder to justify than they were in the first half of 2025 when inflation was lower.
This has meant some forecasters have adjusted their expectations of a final interest rate cut before the end of the year and instead think the base rate will remain at 4% until the outlook for inflation is more positive.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said July’s inflation reading “probably extinguishes hope of a September interest rate cut, while strengthening underlying inflationary pressures calls into question whether policymakers will be able to relax policy again this year”.
A similar sentiment is echoed by Steve Clayton, head of equity funds at Hargreaves Lansdown, who said July’s inflation reading means interest rate cuts “look less assured”, adding: “The Bank of England has been projecting an upturn in inflation in the latter part of the year and this indeed seems to be the case.
“But the strength of the upturn will be a concern for the Bank’s rate-setters, who need to be confident of an eventual ebbing away of price pressures before they push rates much lower from here.”
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