Inflation in the United Kingdom rose more than expected to its highest in 18 months in July, driven by higher food and airfare costs, official figures showed on Wednesday, once again leaving the country with the fastest rate of price increases among the world's largest economies.
The Office for National Statistics (ONS) said consumer price inflation was 3.8% in the year to July, up from 3.6% in June, tempering market expectations that the Bank of England (BoE) will cut interest rates again this year.
Most economists had anticipated a more modest rise in inflation to 3.7%.
With inflation now at its highest rate since January 2024 and nearly double the Bank of England's target of 2%, the prospects of another rate cut in 2025 are diminishing.
Inflation in Britain's services sector – which is watched closely by the Bank of England – accelerated to 5% from 4.7% a month earlier.
The BoE expected headline inflation to rise to 3.8% in July but had forecast a smaller 4.9% rise in services prices.
The latest increase is another blow to the Labour government, which was partly propelled into power last July because of the cost-of-living crisis, which saw inflation rise to over 11% at one time.
Treasury chief Rachel Reeves acknowledged there was "more to do to ease" the cost-of-living.
The central bank cut its main interest rate by a quarter of a percentage point to 4% earlier this month, but only after a narrow 5-4 vote by policymakers and it suggested it would slow the already gradual pace of lowering borrowing costs due to inflation's persistence.
That marked its fifth reduction in a year, when policy makers began lowering borrowing costs from a 16-year high of 5.25%. The Bank of England's key rate, a benchmark for mortgages as well as consumer and business loans, is now at the lowest level since March 2023.
Sterling rose slightly after the data was published and investors expected a longer wait before the next rate cut.
"July's outturn 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," said Suren Thiru, economics director at the chartered accountants institute ICAEW.
A quarter-point cut is not fully priced in until March 2026. Earlier this month, the next rate cut was viewed as highly likely before the end of 2025.
"The economy is experiencing a bout of high inflation and weak growth that will likely remain until next spring," said Deloitte Chief Economist Ian Stewart. He said it was unclear whether the BoE would cut rates again in 2025.
The BoE thinks British inflation will hit 4% in September, double its target, and stay above 2% until mid-2027.
Inflation the United States held at 2.7% in July and in the eurozone, it is expected to remain around the European Central Bank's (ECB) 2% target over the coming years.
Some of the difference reflects how energy and other utility prices are regulated in Britain. Big increases in utility bills in April have boosted year-over-year inflation comparisons.
Britain's relatively tight labor market, which economists say has become more rigid since Brexit, is also putting upward pressure on prices. Wage growth in Britain has slowed but at about 5% it is too high for the BoE to feel comfortable about inflation returning rapidly to 2%.
Furthermore, employers say that a tax increase imposed on them in April by Treasury chief Rachel Reeves and a big jump in the minimum wage are forcing them to put up prices.
Wednesday's data showed the biggest contributor to July's rise in inflation came from transport costs, particularly airfares – a component that BoE policymakers sometimes disregard because of its volatility.
Airfares soared by 30.2% between June and July, the biggest jump since the collection of monthly data began in 2001.
Electricity prices, petrol, soft drinks and hotel rooms also pushed up the annual rate of inflation between June and July.
The ONS said it saw no evidence that a tour by rock band Oasis pushed up hotel costs. Previous tours by performers such as Taylor Swift nudged up inflation, some economists have said.
Food and non-alcoholic drink prices – big influences on how the public thinks about inflation – were 4.9% higher than a year earlier, the biggest rise since February 2024. The BoE forecasts food inflation will peak at 5.5% at the end of the year.
ONS data last week painted a picture of an economy with enough momentum to keep inflation high. Output grew by more than expected in the second quarter and the labor market, while still losing jobs, showed signs of stabilization.
Data published earlier on Wednesday showed basic pay settlements by British private-sector employers held at 3% in the three months to July for the eighth monthly report in a row by data firm Brightmine.
The ONS, which has received criticism for problems with its data, said it had identified a "minor error" in the imputation of missing data for seasonal items but it had no impact on headline CPI.
