Inflation rises to 3.8 per cent, higher than the 3.7 per cent expected and the highest rate since January 2024, as the Bank of England faces pressure to delay further rate cuts, with CPI forecast to hit 4 per cent in September.
Standard Life, part of Phoenix Group Managing Director for Retail Direct Dean Butler says: “July’s inflation data shows that price pressures remain stubborn, and this month the long-awaited return of Oasis looks to be a contributing factor – they’ve been driving up hospitality prices in the cities hosting their gigs. We can’t blame the Gallaghers for everything, however, with food and air fares continuing to impact the headline rate of inflation. These figures come in the context of a divided Bank of England – the Bank needed a second round of voting to cut interest rates by 0.25 per cent on 7th August – and with CPI forecast to rise as high as 4 per cent in September, it looks likely extreme caution will be applied before any further cuts.
“For borrowers, this could mean costs are higher for longer, particularly for mortgage holders and those with other forms of debt. On the other hand, savers could benefit, with some best buy easy-access savings accounts still offering an inflation-beating rate. Crucially, there’s a wide variation, so it’s worth shopping around. With inflation creeping up, any cash gains are still likely to be marginal in real terms – those willing and able to accept an element of risk could consider investing for a better chance of substantial returns above inflation, perhaps through a tax efficient product like a stocks and shares ISA or, taking a longer-term view, a pension.”
Schroders fixed income strategist, global unconstrained fixed income Marcus Jennings says: “With core inflation heading higher, beating market expectations, this brings further into question the Bank of England’s ability to ease interest rates in the near term.
“This was brought into focus by the closely watched services inflation measure rising more than expected to 5 per cent year-on-year. That said, volatile airfares helped drive inflation higher over July, which could reverse in coming months.
“Inflation in the near term was always going to put greater emphasis on the labour market getting weaker to justify interest rate cuts. Today’s upside surprise only reiterates this further.”
AJ Bell head of financial analysis Danni Hewson says: “Households didn’t need the official data to know that many prices have been edging up again, stretching already tight budgets. Headline CPI is now at levels not seen since early 2024 and the Bank of England has warned things will get worse before inflation gradually fades back towards that elusive 2 per cent target.
“Everyone’s inflation experience will be different, but all those parents who saved for months to take the family on a post-school break will have had first-hand experience of one of the main drivers of July’s larger than expected jump.
“It always feels unfair when you watch airfares shoot up on the first day of parents’ six-week summer window and it’s notable that with the holidays falling earlier in July this year, the cost of a week in the sun would have been subject to that school holiday premium and reflected in this month’s figures.
“Petrol prices had also edged up on the previous month and bars, restaurants and hotels all saw prices creep up, making a UK break more expensive as well. A recent survey from the UK hospitality sector and other sector industry bodies reported that 79 per cent of those surveyed had felt compelled to put up prices due to the impact of increased labour costs.
“But it’s that weekly trip to the local supermarket which gives most of us the greatest insight into our cost of living. For the fourth month in a row food inflation has risen, up to 4.9 per cent in July – a level not seen in more than a year.
“Meat, coffee, orange juice and chocolate were amongst the items putting the biggest pressures on budgets. With UK farmers highlighting the expected impact of a dry summer on food production, many households will be worried that it’s going to take a considerable amount of time before these higher prices unwind.
“For UK rate setters it’s the hike in service sector inflation which is likely to narrow their opportunity to cut the base rate further this year. Looking at market expectation this morning, worries that persistent inflation will continue to influence pay awards despite a cooling labour market makes it increasingly likely we’ve seen the last cut for 2025.
“With energy bills also expected to rise in the autumn and continued speculation about potential tax hikes in the upcoming Budget, caution is likely to be at the forefront of many people’s minds.
“To add further pressure to many budgets comes the expectation that rail fares could jump by a whopping 5.8 per cent next year after July’s RPI number came in at 4.8 per cent.”
