UK inflation rises to 2.9% as Iran war drives up energy bills | Inflation

UK inflation rose to 2.9% in July as the impact of the Iran war on energy prices triggered a renewed cost of living squeeze for British households.

The Office for National Statistics said inflation rose from a 15-month low of 2.6% in June, driven by the rising price of gas and electricity. Matching City economists’ forecasts, it was the first rise in the annual rate as measured by the consumer prices index since March.

Underscoring the challenge for Andy Burnham’s government to give “breathing space” to hard-pressed households, the acceleration in price rises comes after consumers in Great Britain faced the sharpest summer increase in energy bills in four years in July after the US-Israel war on Iran sent shock waves through global energy markets.

The 13% increase in the cap on energy bills at the start of July led to a rise in gas and electricity bills.

The ONS said consumers faced other pressures alongside the biggest jump in gas prices since Russia’s invasion of Ukraine in 2022, including furniture prices falling by less than usual for this time of year, and a smaller fall in clothing prices because of reduced discounting.

However, the prices of raw materials and goods leaving factories slowed, driven by a drop in crude oil and refined petroleum prices in July.

Against a volatile backdrop in the Middle East, the Bank of England is considering whether to raise interest rates from as early as next month in response to fears over stubbornly high inflation becoming entrenched in the economy.

It comes as the chancellor, John Healey, prepares for a tough October budget as rising inflation and higher borrowing costs complicate the task of funding Burnham’s policy priorities.

Burnham used his first week as prime minister to announce a series of “breathing space” measures to ease the cost of living, including cutting VAT to reduce consumer electricity bills by an average of £45 a year from October.

However, cost of living pressures could intensify in October when the energy price cap is next adjusted. The consultancy Cornwall Insight has predicted the cap will rise by 4% in the next quarter, taking average bills to a three-year high.

Healey said the UK economy was resilient despite “Iran war inflation” driving up prices for British households. “There is more to do to restore hope and build a stronger economy where prosperity is shared more fairly across Britain.”

Official figures show Britain’s economy overcame gloomy forecasts to grow at the fastest rate in the G7 in the first half of this year. Inflation had also shown signs of cooling from a peak of 3.8% last year. The headline rate had been on track to fall close to 2% before the outbreak of the Iran war in late February.

Economists said the Bank could “look through” the latest energy price shock as a cooling jobs market limited the risk of inflation sticking at higher levels. Separate figures on Tuesday showed wage growth in the UK slowed in June and vacancies hit a five-year low.

Ruth Gregory, the deputy chief UK economist at the consultancy Capital Economics, said: “As the latest rebound in energy prices doesn’t go much further, we still think the weak labour market will prevent second-round effects, meaning inflation falls to 2% next year.”

However, concerns are mounting as the fighting in the Middle East and extreme weather hitting food production worldwide rekindle fears of a sharp inflation increase around the globe.

Threadneedle Street kept borrowing costs unchanged last month as it warned that a worst-case scenario – involving further escalation in the war – could drive UK inflation to a peak of 4.5% by the middle of 2027.

The latest figures showed core inflation – which excludes volatile items including energy and food – remained unchanged at 2.6%, slightly higher than City economists’ forecasts for a reading of 2.5%. Services inflation eased from 3.6% to 3.4%.

James Smith, the chief economist at the Resolution Foundation, said: “The good news is that underlying pressures are still easing, with services inflation continuing to fall. The bad news is that this fresh bout of inflation is being driven by events in the Middle East that are largely beyond the government’s control.”