UK Inflation Set to Climb to 2.9% as Energy Bills Rise
UK inflation is forecast to have risen to 2.9% in July 2026, up from 2.6% in June, driven mainly by Ofgem's 13% increase to the household energy price cap. ONS figures due on 19 August will confirm the reading, which economists surveyed by The Guardian expect to land at 2.9% — a sharp reversal after inflation had been falling steadily through the spring. The Guardian
Ofgem — the regulator that sets a ceiling on what energy suppliers can charge households — raised the cap in July, pushing average annual energy bills to £1,862. Thomas Pugh, chief economist at RSM UK, estimates the cap rise alone will add roughly 0.44 percentage points to headline CPI (the Consumer Prices Index, the UK's main measure of inflation). The energy component is the single largest identifiable driver of the July uptick, though it is not the only pressure point. Reuters
The broader context here is the ongoing Iran war, which continues to send shock waves through global energy markets and fuel volatility in the oil price. UK inflation had been on track to fall close to the 2% target before the conflict erupted. A brief de-escalation earlier in the summer allowed June CPI to dip to 2.6%, down from a peak of 3.8% the previous year, but that reprieve now appears short-lived. Reuters
The Bank of England's own forecast anticipates inflation reaching 3.2% before the end of 2026. At its July meeting, the Monetary Policy Committee — the group that sets UK interest rates — voted 6-3 to hold the Bank Rate at 3.75%, citing the need to await evidence on how the Iran war feeds through to domestic prices. With July's figures likely to validate those concerns, the Bank is now considering raising interest rates as early as September. Reuters
Firms' pricing expectations are also drifting upward. The Bank's Decision Maker Panel — a regular survey of business leaders — showed companies expecting their own prices to rise 4.1% over the coming year in the three months to June, up from 4.0% previously. That is a signal cost pressures may be feeding into wage- and price-setting behaviour, even as separate labour market data due this week is expected to show a continued slowdown in wage growth. Reuters
The inflation resurgence complicates what had been an otherwise strong economic narrative. Britain's economy grew at the fastest pace in the G7 in the first half of 2026, according to official figures released in August. A rate rise in September — the Bank's main tool for cooling inflation by making borrowing more expensive — would test the durability of that expansion, particularly if the Bank judges that inflation is becoming entrenched rather than transitory.
For Andy Burnham's government, the timing is acute. The renewed cost-of-living squeeze lands ahead of what is already expected to be a difficult autumn budget, narrowing fiscal space for household support measures. The Ofgem cap rise and broader energy-driven inflation will intensify political pressure to intervene, even as Treasury planners weigh competing demands.
Additional household cost pressures may be on the horizon. Ofwat, the water regulator, is considering plans to impose "surge pricing" on water usage during droughts, potentially charging customers more in summer and less in winter. While still at the proposal stage, the scheme would add another seasonal layer to household bills at a time when energy costs are already elevated.
On the methodological side, the ONS has significantly reshaped how it measures grocery inflation. Since the February 2026 index — published on 25 March — the statistics agency has incorporated scanner data covering approximately 50% of the UK grocery market, drawing on roughly 300 million price points derived from sales of over a billion product units per month, collected at supermarket checkouts and online. Internal ONS comparisons showed that locally collected grocery data (without scanner data) would have produced a CPI reading of 3.1% for the year to February 2026, slightly above the official rate of 3.0% — suggesting the new methodology is marginally dampening measured grocery inflation. ONS
The government's Great British Summer Savings scheme, announced on 21 May and effective from 25 June, did not affect the June 2026 inflation indices because it took effect after the collection period. The scheme potentially affects a small number of low-level items in the ONS inflation baskets, such as attractions and admissions to cultural events, and could have a modest downward influence on the July figures. ONS
The trajectory is now clear in its direction, if not its precise magnitude. Inflation decelerated to 2.8% in April, its lowest since March 2025, before edging down further to 2.6% in June. July's expected reading of 2.9% reverses that trend. The Bank's own forecast of 3.2% by year-end, combined with firm-level pricing expectations above 4%, suggests the disinflationary phase that began in late 2025 has stalled. Whether that stall becomes a sustained reversal depends largely on the trajectory of the Iran conflict and its transmission through energy markets — factors that remain outside the Bank of England's control.
What policymakers can control is the policy response. A September rate rise would signal that the MPC views the inflation overshoot as more than a one-off energy-cap mechanical effect. The 6-3 split at July's meeting already revealed a minority prepared to act. If Wednesday's figures confirm the 2.9% consensus, the question for the September meeting shifts from whether to tighten to how aggressively.
