Inflation in the United Kingdom hit 3.8% in July, well above analysts’ forecasts. This striking data was published by the UK’s Office for National Statistics (ONS) on Wednesday. This is the fastest annual rate since a year ago in early 2022. This rise has further exacerbated worries over the cost of living crisis that is still impacting households nationwide.
U.K. Chancellor Rachel Reeves acknowledged the challenges ahead in managing inflation, stating that further measures are necessary to alleviate the financial pressures citizens face. Despite soaring inflation, the British pound didn’t budge much against the dollar, worth $1.3489.
The consumer price index (CPI) was central to the US inflation calculation. Specifically, huge increases in the prices of petrol and diesel played the biggest role, as opposed to their major declines over the same months last year. Food prices remain under pressure from upward forces. This trend is particularly pronounced for products such as coffee, fresh orange juice, meat and chocolate.
Grant Fitzner, the chief economist at the ONS, traced the big increase to air fares. He called it out as a major cause of the inflation surge.
“The main driver was a hefty increase in air fares, the largest July rise since collection of air fares changed from quarterly to monthly in 2001.” – Grant Fitzner, chief economist at the ONS
Core inflation jumped to 3.8% in July. That’s up from 3.7% in June, and that number excludes some volatile goods such as energy and food. This increase is symptomatic of larger economic trends as lawmakers at every level begin to feel the squeeze of growing demands.
GDP data came as a shock with a robust 0.3% expansion in Q2. Yet this result provides a ray of economic hopefulness. Sanjay Raja, a senior economist at Deutsche Bank, cautions against expecting this relief from price pressures in the months ahead. He’s quick to point out, difficulties are very much alive.
“We expect price pressures to soften in the fourth quarter of 2025; however, tracking closer to 3.5% year-on-year by year-end.” – Sanjay Raja, senior economist at Deutsche Bank
In Raja’s models, headline CPI could dip as low as 2.75% year-on-year by Q2 2026. They argue that a further cut to 2.25% by end-2023 is plausible. He was clear that getting back to a stable inflation rate of 2% is more difficult and complicated.
In recent decisions, policymakers voted 5-4 to cut interest rates, reflecting their intention to navigate the inflation landscape carefully while considering growth indicators.
“We have taken the decisions needed to stabilize 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.” – U.K. Chancellor Rachel Reeves