UK inflation hits highest level in 18 months

Inflation jumped again in July, hitting 3.8%.

Summary

  • Inflation rose to 3.8% in July, up from 3.6% in June, according to figures published by the Office for National Statistics (ONS) this morning. It means inflation is at its highest level since January 2024.
  • The largest upward contribution to the inflation jump came from the transport division, particularly airfares.
  • Longer term, Bank of England forecasts suggest inflation will peak at 4% in September before gradually falling back towards the 2% target by 2027.
  • The Bank of England’s governor Andrew Bailey recently told the BBC that although the path for interest rates is still downwards, the course is now “a bit more uncertain” given ongoing inflationary pressures.
  • The Bank cut interest rates to 4% on 7 August in a knife-edge decision that required two votes before reaching a 5-4 verdict. The close split has caused investors and economists to adjust their interest rate expectations going forward.
  • Most experts now expect a maximum of one more interest rate cut before the end of the year.
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What to expect from tomorrow’s inflation report

Households should brace themselves for another jump when July’s inflation report is published at 7.00am tomorrow. The Bank of England expects the headline inflation figure to jump to 3.8%, up from 3.6% in June.

Economists at Deutsche Bank are also expecting a 0.2 percentage-point jump compared to last month’s reading. Meanwhile, research firm Pantheon Macroeconomics is expecting a slightly smaller increase, bringing inflation to 3.7%.

Man pushing shopping cart of groceries up line chart arrow

After briefly returning to the Bank of England's 2% target last year, inflation has been rising in recent months.

(Image credit: Malte Mueller via Getty Images)

What’s driving price increases?

“There’s likely to be more upside in services momentum, particularly around airfares and accommodation prices, with the former supported by the timing of school holidays and the latter potentially flattered by an Oasis-related bump higher,” said Sanjay Raja, chief UK economist at Deutsche Bank.

“We expect food inflation to continue its ascent – but we do think we may be nearing the peak,” Raja said.

Oasis reunion tour, Principality Stadium in Cardiff, 4 July 2025

Deutsche Bank thinks the Oasis reunion tour may have contributed to higher accommodation prices in July.

(Image credit: Photo by AFP STRINGER / AFP via Getty Images)

Inflation “much hotter than government and Bank of England would like”

Although inflation has slowed considerably from its peak of 11.1% in October 2022, it remains elevated. Victoria Scholar, head of investment at the platform Interactive Investor, points out that it is “much hotter” than both chancellor Rachel Reeves and the Bank of England would like.

This was reflected at the Bank’s latest rate-setting meeting, when policymakers voted to cut rates by a narrow 5-4 majority. Two votes were required before that verdict was reached. Commentators had been expecting a more decisive vote and, as a result, some have dialled down the tone of their forecasts going forward.

“Although we still expect another 25 basis-point cut in November, our call is made with much less confidence,” said Andrew Goodwin, chief UK economist at Oxford Economics.

“We think it wouldn't take much to convince the committee to pause for longer before cutting again. If inflation continues to surprise to the upside, this could tip the balance towards no change, particularly if market pricing moves against a rate cut.”

Governor of the Bank of England Andrew Bailey

Governor of the Bank of England, Andrew Bailey

(Image credit: Photographer: Darren Staples/Bloomberg via Getty Images)

What does rising inflation mean for your money?

At the basic level, rising prices means the cost of everyday goods and services is going up, stretching household budgets. This could prove challenging if your income isn’t rising at the same pace.

“While workers may take comfort in the fact that pre-tax incomes are still growing faster than inflation for now… this is offset by a heavier tax burden and the risk that wage growth could slow further from here,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“With uncertainty around the timing of future rate cuts and businesses adopting more cautious hiring strategies – or turning to AI to plug skills gaps – consumers would be wise to adopt a prudent approach to expenditure,” she added.

Woman looking at expenditure and managing personal finances

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What would another inflation jump mean for savers?

Rising inflation is bad news for those with cash savings, particularly when coupled with interest rate cuts. Inflation erodes the real value of cash, as the pound in your pocket doesn’t go so far when the cost of goods and services goes up.

Piggy bank being lifted up by a balloon.

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Can investing help you beat inflation?

There are some caveats – for example, you should be willing to keep the money invested for a minimum of five years to ride out short-term volatility. Before investing, you should also make sure you have paid off any high-interest debts and put aside enough cash to cover emergencies and any short-term savings goals.

It is important to invest sensibly across a diversified range of opportunities rather than putting all of your eggs in one basket. If you don’t feel confident picking your own investments, a ready-made fund could be a good option.

Our beginner’s guide shares some useful tips for those who are thinking about investing for the first time.

Woman looking at investments on phone screen

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Rising inflation worsens the impact of fiscal drag

Inflation also erodes the value of the tax-free personal allowance – the amount of income you do not need to pay tax on. This has been frozen at £12,570 since 2021.

“Frozen tax thresholds affect everyone. With the personal allowance and higher-rate threshold frozen until 2028, this means that even lower earners will gradually pay tax on more of their income,” said Craig Rickman, personal finance expert at Interactive Investor.

“The noise around fiscal drag is likely to crank up over the coming months as the Autumn Budget heaves into sight. With the government at risk of missing its narrow, iron-clad fiscal rules, tax hikes could be in the offing.”

Rickman added that extending the freeze on tax thresholds beyond 2028 is “a way for the government to raise billions of pounds without technically breaking its manifesto promise not to raise taxes on working people”.

HMRC building

(Image credit: Peter Dazeley via Getty Images)

How are investors responding to rising inflation?

“While rate cuts should disincentivise saving, rising inflation and the prospect of further tax rises in the autumn are forcing investors to exercise a degree of caution. With economic growth slowing to 0.3% between April and June, policymakers must reassure investors and boost confidence in the economy in order to unlock growth,” he said.

“There are undoubtedly opportunities in interest rate sensitive sectors and UK equities, but we are seeing investors adopt a patient, disciplined approach with a focus on long-term returns.”

City of London skyline

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Join us tomorrow morning

  • The rate of inflation is expected to jump again tomorrow, potentially hitting 3.8%.
  • This would mark a 0.2 percentage-point increase compared to June’s reading of 3.6%.
  • Summer spending could be partly responsible for the rise, including higher airfares and accommodation prices. Food prices have also been adding pressure in recent months, and this trend could continue in tomorrow’s report.

The Bank of England will also be keeping a close eye on core and services inflation to get a sense of how embedded inflationary pressures are in the economy:

  • Core inflation strips out categories that tend to see short, sharp fluctuations in prices, like food and energy.
  • Services inflation covers things like hotel stays, airfares, educational costs and more. Services make up around 80% of the UK economy, so this is an important measure.
  • Core inflation is expected to hold steady at around 3.7% tomorrow, according to Deutsche Bank, while services inflation could creep up to 4.9% (compared to 4.7% in June).

All of this has important implications for household budgets and the Bank of England’s interest rate decisions – which in turn impact things like savings rates and mortgage rates. Join us tomorrow as we share the latest news and analysis.

Welcome back – 15 minutes to go

Good morning and welcome back to our live report. In 15 minutes, the Office for National Statistics (ONS) will publish July’s inflation figure. It is expected to show another jump to 3.8%, which would be the highest reading since January 2024.

Inflation shopping basket

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Patience could be required from investors when it comes to inflation

Although investors won’t be delighted if inflation jumps again this morning, patience could be required, according to Michael Field, chief equity strategist at investment firm Morningstar.

“Economists have previously warned that we could be dealing with elevated levels of inflation for a transitory period,” he said.

“We believe this is how the Bank of England will view the situation when making upcoming decisions on interest rate levels. Interest rates in the UK are the highest in the western world, so the bank has plenty of room for manoeuvre, even with elevated inflation in the short term.”

Field points out that UK equity markets are trading at all time-highs. “While inflation remains somewhat concerning, the effect of lower interest rates feeding through the economy should only add weight to investor confidence.”

Person looking at stock market data on laptop

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BREAKING: Inflation jumps to highest in 18 months

What drove the inflation jump?

Commenting earlier this week, Sanjay Raja, Deutsche Bank's chief UK economist, said: “There’s likely to be more upside in services momentum, particularly around airfares and accommodation prices, with the former supported by the timing of school holidays and the latter potentially flattered by an Oasis-related bump higher.”

Transport costs up 3.2% as airfares took off

Airfares jumped by 30.2% on a monthly basis – the largest July increase since records began in 2001.

Passenger jet airplane over clouds

(Image credit: Witthaya Prasongsin via Getty Images)

Petrol prices also pushed inflation higher

Woman refuelling car

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Rachel Reeves: "More to do to ease the cost of living"

Responding to this morning's report, Reeves said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.

“That’s why we’ve raised the minimum wage, extended the £3 bus fare cap, expanded free school meals to over half a million more children, and are rolling out free breakfast clubs for every child in the country. Through our Plan for Change we’re going further and faster to put more money in people's pockets.”

Chancellor of the Exchequer Rachel Reeves

(Image credit: Jacob King - WPA Pool / Getty Images)

Larger-than-expected jumps in core and services inflation could create concern

Core and services inflation both jumped in July – and by more than some economists were expecting.

Food prices accelerate again

Woman buying orange juice in supermarket

The ONS said orange juice was one of the items pushing food and drinks prices up in July

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Higher inflation could be bad news for mortgage rates

"Borrowers holding out for more cuts may want to keep close tabs on mortgage rates. It’s far from doom and gloom but securing a rate now will protect against any turnaround while still allowing for a review before completion, if there are further improvements."

Model of a house, keys and calculator on top of mortgage rate document

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Upcoming reports will be important for pensioners, with implications for triple lock

Each year, state pension payments are increased in line with the triple lock rules. This means pensioners see this portion of their income rise in line with inflation, wage growth, or by 2.5% – whichever is highest.

"Wage growth has been drifting down, but it seems likely we will see a state pension increase somewhere in the 4-4.5% ballpark for next year. This would give someone on a new state pension an uplift somewhere around £479-538 per year. Someone on a full basic state pension would see that portion of their income rise by between £367-£413," said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

"These increases would be much smaller than the huge boosts we’ve seen in recent years, but they will be welcome nonetheless. The increase won’t be implemented until April 2026 and it’s to be hoped that inflation will have dipped significantly by that point, so it should give a bit more breathing space to pensioner budgets that have been sorely stretched."

Pensioner blows out candles on birthday cake

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Does today’s inflation print look worse than it is?

Although today’s jump takes inflation to its highest level in 18 months, several experts point out that some of the drivers are short term in nature.

“Services inflation rose slightly but the root cause was holiday expenditure: airline prices jumping as school holidays started, and hotels and restaurants no doubt reflecting the same,” said Michael Browne, investment strategist at Franklin Templeton, the asset management firm, “The comment in the MPC report that even the Hawks think this is short term, has not received enough scrutiny.”

Annual house price inflation is 3.7%

UK house prices rose by 3.7% over this time period, bringing the average property to £269,000 – around £9,000 higher than a year ago. On a monthly basis, prices rose by 1.4%.

Street of multi-coloured terraced houses in London

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Remortgaging this year? Here’s what today’s economic environment means for you

For the reasons explored in a previous post, today’s inflation jump may come as bad news for those shopping around for a new mortgage deal. Given inflation is high and rising, many expect the Bank of England to slow down the pace of rate cuts – which could mean mortgage rates stall.

For someone borrowing £400,000 over a 25-year mortgage term, this drop in rates equates to a £455 drop in monthly repayments.

Things don’t look quite so good for those coming to the end of a relatively cheap five-year deal agreed before rates started rising in 2021. Their monthly repayments are likely to jump when they refinance.

Model house on desk with calculator, house keys, coins and glasses, with percentage symbols superimposed over the photo. Mortgage concept.

(Image credit: Sakchai Vongsasiripat via Getty Images)

Moneyfacts: Fewer than half of savings accounts beat inflation

"With inflation running higher than the interest savings earn, money left languishing in a low-interest account is losing its spending power – making it tougher to achieve a sense of financial resilience or save towards goals."

Pink piggy bank and hammer

(Image credit: Mrs via Getty Images)

Where is inflation heading next?

There has also been some uncertainty arising from global developments, including changes in trade policy led by US president Donald Trump. “While recent trade agreements mean there is less uncertainty than earlier in the year, we continue to watch closely what this could mean for UK inflation,” the Bank of England said.

That concludes our inflation live coverage for this month. Thank you for joining us. Here is a list of upcoming CPI dates, covering the remainder of 2025:

  • 17 September (covering August)
  • 22 October (covering September)
  • 19 November (covering October)
  • 17 December (covering November)
  • 21 January 2026 (covering December)

We will be back with further analysis then.