British inflation rose to a four-month high in July as higher household energy bills pushed up prices. Inflation is also expected to increase further if the war in Iran continues to drive up energy costs.
The annual consumer price inflation rate increased to 2.9% in July from 2.6% in June, according to the Office for National Statistics. The rise followed a 13% increase in the maximum household energy tariff allowed by British regulators last month.
The July inflation figure was in line with expectations from economists surveyed by Reuters. The Bank of England had previously forecast a smaller increase to 2.8% and expects inflation to reach a peak of 3.2% later this year.
The figures are likely to reinforce Prime Minister Andy Burnham’s focus on easing cost-of-living pressures for households. However, the government’s limited financial headroom ahead of its October budget could restrict the scope for wider support measures.
Data may reassure Bank of England
The latest inflation figures are unlikely to cause major concern at the Bank of England because they contained few unexpected developments. Labour market data released a day earlier also showed signs of cooling, which could limit the longer-term impact of inflation linked to the Iran war.
The Bank has remained mindful of the sharp rise in prices that followed Russia’s full-scale invasion of Ukraine in 2022. Combined with a tight post-COVID labour market, the energy shock pushed UK inflation above 11%.
US President Donald Trump said on Tuesday that no talks were taking place with Iran and maintained that the Strait of Hormuz was open. Iran has said the strategically important waterway remains closed to shipping.
Sterling and UK government bond futures showed little immediate reaction to the inflation figures.
“July marks the start of a gradual rise in inflation but is unlikely to spur the Bank of England into action,” said Yael Selfin, Chief Economist at KPMG, who expects inflation to reach 3.5%.
“Unlike in 2022, when higher energy prices fed into wider cost increases across the economy, softer labour market conditions are helping to limit the scale of a similar pass-through this time around.”
