UK Inflation Climbs to 3.8% in July, Approaching 4.0% Peak

• UK inflation rises to 3.8% in July, led by energy and food price increases.

• BoE forecasts 4.0% inflation peak; rate cut possible in November, risks delay to 2026.

UK consumer price inflation edged up to 3.8% in July from 3.6% in June, slightly surpassing the consensus forecast of 3.7%, official figures showed Wednesday. The increase was mainly fueled by energy costs, as fuel price inflation improved from -9.0% in June to -6.7% in July, contributing an additional 0.1 percentage points to the overall CPI. 

Services inflation also played a role, rising from 4.7% to 5.0%, exceeding the Bank of England’s expected 4.9%. This uptick partly stemmed from unfavorable base effects in communications and hospitality sectors, alongside a sharp 30.2% month-on-month surge in airfares related to school holidays. Food prices climbed from 4.6% to 4.9%, above forecasts by both the Bank of England and Capital Economics, representing a key factor affecting household inflation expectations.

The Bank of England had already anticipated the July inflation increase in its August Monetary Policy Report, forecasting an 18-month high of 3.8%. Inflation looks set to peak around 4.0% in September, driven by worse base effects pushing services inflation beyond 5.0%, alongside rising food inflation potentially reaching 5.5%, influenced by past hikes in agricultural commodity prices.

Despite these gains, Capital Economics suggests a possible interest rate cut in November, citing a weakening labor market that should eventually curb services inflation. However, they also highlight the risk that higher inflation expectations and wage increases could postpone rate reductions until 2026.