Sharp rise in airfare and food costs pushed UK inflation higher in July, denting rate cut hopes

Key Points

• UK inflation rose to 3.8% in July, driven by a 30.2% surge in airfares, tempering expectations for further interest rate cuts by the Bank of England.
• The increase in inflation exceeds most economists' predictions, which anticipated a rise to 3.7%, signaling heightened inflationary pressures.
• The Bank of England recently cut its main interest rate to 4%, the lowest since March 2023, but the latest inflation figures diminish prospects for future cuts.
• This inflation uptick poses a challenge for the Labour government, which rose to power amid a cost-of-living crisis, as Treasury chief Rachel Reeves emphasized the need for further measures to relieve financial pressures.

LONDON (AP) — Higher food and airfare prices pushed U.K. inflation above expectations in July, official figures showed Wednesday, which has tempered market expectations that the Bank of England will cut interest rates again this year.

The Office for National Statistics said consumer price inflation was 3.8% in the year to July, up from 3.6% in June. One of the contributors was airfares soaring by 30.2% between June and July, the biggest jump since the collection of monthly data began in 2001.

Most economists had anticipated a more modest rise in inflation to 3.7%.

With inflation now at its highest rate since January 2024 and nearly double the Bank of England's target of 2%, the prospects of another rate cut in 2025 are diminishing.

“July’s outturn probably extinguishes hope of a September interest rate cut, while strengthening underlying inflationary pressures calls into question whether policymakers will be able to relax policy again this year," said Suren Thiru, economics director at the chartered accountants institute ICAEW.

The bank cut its main interest rate by a quarter of a percentage point to 4% earlier this month, its fifth reduction in a year, when policy makers began lowering borrowing costs from a 16-year high of 5.25%.

The Bank of England’s key rate, a benchmark for mortgages as well as consumer and business loans, is now at the lowest level since March 2023.

The latest increase is another blow to the Labour government, which was partly propelled into power last July because of the cost-of-living crisis, which saw inflation rise to over 11% at one time.

Treasury chief Rachel Reeves acknowledged there was “more to do to ease" the cost-of-living.