• Published

Inflation in the UK was 2.9% in the year to July, the highest rate in four months and above the Bank of England's 2% target.

The rise was in line with what economists had predicted, after regulator Ofgem raised the price cap on household gas and electricity costs.

Inflation is widely expected to rise again in the coming months.** **

What is inflation?

Inflation is the increase in the price of something over time.

For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%.

How is the UK's inflation rate measured and what does it mean for UK interest rates?

The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).

This virtual "basket of goods" is regularly updated to reflect shopping trends, with alcohol-free beer, dashboard cameras, and pet grooming equipment among items added in 2026, while premium bottled lager and sheets of wrapping paper were removed.

The ONS uses price changes in the basket of goods over the previous 12 months to calculate inflation.

The main inflation measure is called the Consumer Prices Index (CPI), external, and the latest figure is published every month.

The Bank of England looks closely at the inflation figures when deciding whether to increase, lower or hold its base interest rate, which is currently 3.75%.

Putting rates up makes borrowing more expensive, giving people and businesses less money to spend, reducing demand for goods and slowing price rises.

But it is a careful balancing act â increasing borrowing costs also risks harming the economy.

For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.

Businesses also borrow less, making them less likely to create jobs. Some may cut staff and reduce investment.

What is happening to UK inflation?

Although CPI inflation of 2.9% remains above the Bank of England's 2% target, it is well below the 11.1% figure reached in October 2022 as gas and oil prices soared in the wake of Russia's full-scale invasion of Ukraine.

That was the highest rate for 40 years.

Although inflation has fallen significantly since then, prices have not fallen. They have just risen less quickly.

The higher figure for July was mostly caused by a 13% rise in the price cap on gas and electricity costs, which added £221 a year to the typical household's bill.

Food price inflation last month was the lowest since September 2021.

Prices for beef and veal rose by 2.5% in the year to July, down from 5.1% in the 12 months to June, according to the ONS.

Breaded chicken contributed to an overall slowdown in food price inflation which hit 1.3% in July, the lowest in nearly five years.

But it can take a year for changes in the cost of food to filter through to the shop floor because of the way supply chains work, so prices could still rise as a result of the widespread disruption caused by the war in Iran.

How do energy prices affect UK inflation?

Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.

Before the war in the Middle East broke out, UK inflation had been expected to be at or around the target level of 2% over the next five years, according to the official forecasts published in March 2026.

But in April, the Bank of England warned that disruption to global energy markets could push UK inflation as high as 6% in the worst-case scenario.

When the latest ceasefire took effect, analysts said it could limit further inflation hikes. Oil prices initially fell sharply after the deal was announced, but have risen again since the US and Iran resumed attacks in the Strait of Hormuz in July.

As a result, UK petrol prices are likely to climb back up. This - coupled with the increase in household energy bills from 1 July when the new Ofgem price cap took effect - is expected to push UK inflation higher.

The new Prime Minister Andy Burnham has announced that VAT on household electricity bills will be scrapped, but that will not take effect until October. It is predicted to have a small downward impact on inflation.

Precisely because food and energy prices can be very volatile, the Bank of England also considers other economic measures such as "core inflation", which excludes these costs.

Core CPI was 2.6% in the 12 months to July 2026, unchanged from the 12 months to June.

What is happening to UK interest rates and will they fall again?

The Bank cut interest rates six times between August 2024 and June 2026, which brought rates down to 3.75%, the lowest level since early 2023.

In April, the Bank's Monetary Policy Committee indicated it would act "forcefully" if oil prices did not start to fall, with up to six rate hikes in a worst-case scenario.

At its June meeting, just after a tentative agreement to re-open the Strait of Hormuz, the Bank held interest rates, but oil prices have since risen.

Are wages keeping up with inflation?

The Bank also looks closely at what is happening to wages and unemployment.

The latest official figures show that regular pay in the UK grew ahead of inflation in the three months to June.

Average annual growth in pay (excluding bonuses) during the three-month period was 3.5%, up from in 3.4% the previous quarter.

After taking inflation into account, it means regular pay grew by 0.5% between April and June.

Separate ONS figures showed the estimated number of job vacancies in the UK fell by 6,000 to 707,000 in the three months to July.

The unemployment rate was unchanged at 4.9% in the three months to June.

The number of payrolled employees has also been flat in recent months, at just under 30.3 million.

Experts said the softening labour market was another reason the Bank of England was likely to hold interest rates.

What is happening to inflation and interest rates in Europe and the US?

The US and eurozone countries have also been trying to limit price increases, but both have lower central bank interest rates than the UK.

The inflation rate for countries using the euro was 2.9% in July, according to EU data, external â down from 2.9% in June and 3.2% in May.

But despite those falls, the European Central Bank (ECB) raised interest rates for the first time in nearly three years in June, from 2% to 2.25%.

The ECB held rates at its July meeting, but economists predict it could announce an increase in September as the effects of the Iran war filter through into the European economy.

US inflation was in 3.4% July, down from 3.5% in June, as in the UK, partly as a result of lower fuel costs.

Before those figures were released, the US central bank held interest rates at the current range of 3.5% to 3.75% at its meeting in June, leaving them at the lowest level in three years.

This was the Federal Reserve's first meeting under new chair Kevin Warsh. US President Donald Trump has made it clear he expects Warsh to cut rates more aggressively than his predecessor Jerome Powell.

However, at its meeting in July the Federal Reserve held rates again, with Warsh saying there is no "magic wand" to ease the cost of living for Americans.