The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation increased to 3.8 per cent last month, up from 3.6 per cent in June. The increase was more than expected, with economists forecasting a rise to 3.7 per cent.
Here is why inflation has gone up and what it means for businesses and households in the UK.
Why has inflation risen?
According to the ONS, the biggest factor driving inflation last month was a jump in transport prices.
This was notably the case for air fares, which surged by 30.2 per cent between June and July – the largest increase since monthly data started being collected in 2001, PA news agency reports.
The increase was likely caused by the timing of the school holidays, with families typically facing higher prices to take trips during the peak summer season.
Motor fuel costs also contributed to the hiked inflation, with both average petrol and diesel prices increasing between June and July.
Meanwhile in shops, the overall rate of food and drink inflation rose to 4.9 per cent in July from 4.5 per cent, the fourth month in a row that price rises have accelerated.
Will inflation keep rising?
Economists believe that CPI inflation will keep rising to a peak of 4 per cent in September, before price rises start to ease, which is double the 2 per cent target that the Bank of England is set.
Philip Shaw, an economist for Investec, said he thinks food inflation is likely to edge higher in the coming months amid tougher conditions for suppliers and retailers.
“Beyond this though, inflation looks set to decline,” he said to PA news agency.
“The imposition of VAT on private school fees will drop out of the calculation in January, while the same will happen to a hefty jump in water charges in April.
“Further ahead, we remain of the view that a loosening in conditions in the labour market, in particular easing pay growth, will result in lower services inflation over the course of 2026.
“Hitting the 2 per cent inflation target may be out of reach next year, but should be within sight in 2027.”
What does rising inflation mean for interest rates?
Economists said the Bank of England could have some concerns about rising inflation in the UK’s services sector, which is a considerable focus for the Bank.
The annual rate of services CPI inflation rose to 5 per cent in July from 4.7 per cent in June.
However, experts also think wage growth could continue to come down which would reduce consumer spending power.
Philip Shaw said a rate cut in November will likely “depend on how clear the signs are that inflation will resume its decline towards the end of the year and beyond”.
Elliott Jordan-Doak, senior UK economist for Pantheon Macroeconomics, said that inflation remaining above-target for the foreseeable future will be “forcing” the Bank to keep rates on hold for the rest of 2025 at least.
What impact does a rise in inflation have on households?
The trade body for UK retail businesses, the British Retail Consortium responded to the inflationary figures, with Kris Hamer, director of insight commenting: “Households are once again seeing the cost of their weekly shop climb, with food inflation now up by 1.9 percentage points in just four months.
“This surge has been a key driver behind headline inflation, alongside a rise in transport costs, piling fresh pressure on families already being forced to cut back.
“The Bank of England has been clear that government policies, which have driven up the costs of employment, are fuelling price rises at the till, while poor harvests and global instability have also added further cost pressures.
“There was some limited relief for consumers as clothing and footwear inflation remained subdued while certain everyday food items such as olive oil, butter and cheese did fall in price on the month.
“Retailers have been doing everything they can to prevent price rises but the swathe of costs they now face has left them no room to manoeuvre. The recent administration of Claire’s Accessories is yet more evidence of the pressure the industry is currently facing.
“The Chancellor must avoid burdening the industry with even more taxes this autumn. Instead, she has an opportunity to encourage much needed investment in our high streets by ensuring the planned reforms to business rates offer a significant reduction for retail properties, and leave no shop paying more.”
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