Market News

Story by Phillip Inman

UK inflation rose again last month to a higher-than-expected 3.8% amid higher food prices and travel costs, adding to fears that the Bank of England will delay further interest rate cuts.

Figures showed the annual rate as measured by the consumer prices index climbed from June’s 3.6% reading, sitting above the central bank’s 2% target for the 10th consecutive month.

That overshot financial market forecasts of a 3.7% figure for July and makes another reduction in the cost of borrowing this year unlikely, with financial markets not fully pricing in the chance of a fresh quarter-point cut until next spring.

The data also suggests rail fares are likely to rise by 5.8% next year. Increases in regulated train ticket prices are usually calculated by adding one percentage point to July’s inflation reading as measured by the retail prices index, which was 4.8%.

The Office for National Statistics said a jump in air fares was behind much of the increase in average prices. Tickets on flights out of the UK rose 30% month on month, although much of the increase was because of the timing of the summer holiday break.

Petrol prices added 0.1 percentage points to inflation after a comparison with last year, when prices at the pumps were falling.

Food and non-alcoholic beverages were up 4.9% year on year in July, an increase from 4.5% in the 12 months to June. Beef, orange juice, coffee and chocolate were among the worst-hit products.

Droughts in Spain, Italy and Portugal, where the UK sources much of its fresh fruit and vegetables, have pushed up prices this summer at a time when prices would usually fall.

The increase in food prices will present the government with a difficult negotiating position as it enters talks with public sector unions over pay. Ministers are trying to limit annual earnings increases to below 4%, except for resident hospital doctors. However, higher food prices are likely to lead to demands for higher wages from staff.

Analysts said the likelihood of an interest rate cut this year had diminished but was not impossible.

The National Institute of Economic and Social Research (Niesr) expects inflation to decline in the second half of the year and to fall back to the Bank’s 2% target by the end of 2026.

It said there was a strong argument for a cut in November after a rise in unemployment and decline in job vacancies showed the economy weakening, although the decision would depend on the path of inflation over the coming months.

The Niesr economist Monica George Michail said: “Given that several of the current drivers of annual price increases are one-off policy changes, we think the Bank of England may look through them and cut interest rates one more time this year. However, there remain upside risks especially from food prices and sustained wage pressures, which will force the Bank to remain cautious”

The Bank’s monetary policy committee trimmed interest rates to 4% earlier this month in line with projections of falling inflation over the next two years. However, several of its members voted to hold interest rates until the trend became clearer.

The chancellor, Rachel Reeves, said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.

“That’s why we’ve raised the minimum wage, extended the £3 bus fare cap, expanded free school meals to over half a million more children, and are rolling out free breakfast clubs for every child in the country. Through our plan for change we’re going further and faster to put more money in people’s pockets.”

Companies have blamed employment tax rises and the uncertainty caused by Donald Trump’s tariff war for an increase in domestic prices.

The shadow chancellor, Mel Stride, said the increase in employer national insurance contributions had forced companies to increase prices, making a global rise in prices even worse.

Cornwall Insight, the energy consultancy, said on Tuesday that it expected the energy price cap covering domestic electricity and gas would go up by £17 or 1% in October, adding to domestic fuel costs.

Sharon Graham, the head of Unite, the UK’s second-largest union, said the government needed to ease the pressure on household budgets after the increase in food costs.

“Once again, the soaring cost of basic essentials like food and water is pushing families to the brink. Workers and their families are struggling to pay excessive bills. Pressure needs to be taken off family budgets by giving workers a pay rise. The time for action is now.”