UK inflation hits 18-month high at 3.8%, BoE faces tough policy choices

Britain’s inflation accelerated to 3.8% in July, its fastest pace since January 2024, reinforcing the country’s status as the most inflation-prone among the world’s major economies.

The rise from 3.6% in June was driven largely by higher transport costs, particularly air fares. Services inflation, closely monitored by the Bank of England (BoE) as a gauge of underlying pressures, also quickened to 5% from 4.7% a month earlier.

The figures matched the BoE’s forecasts but outpaced most economists’ expectations. Sterling inched higher after the release.

The latest data complicates the BoE’s policy path. Earlier this month, the central bank delivered its first rate cut of the cycle, but only by a narrow 5-4 vote, with policymakers warning that persistent inflation would slow the pace of further easing.

“Today’s numbers will harden the MPC’s cautious stance,” said Martin Sartorius, principal economist at the Confederation of British Industry. “With the risk of second-round effects still looming, policymakers will not be in a hurry to cut rates again.”

Britain’s inflation is running above the 2.7% in the United States and the euro zone’s level, which hovers close to the European Central Bank’s 2% target. The BoE projects UK inflation will peak at 4% in September and remain above target until mid-2027.

Domestic factors are fuelling the stickiness: April’s surge in regulated utility bills, still-strong wage growth of around 5%, and higher business costs from payroll taxes and a sharp rise in the minimum wage.

Food and non-alcoholic drink prices rose 4.9% year-on-year, the steepest increase since February 2024, underscoring households’ cost-of-living pressures.

Despite inflationary strains, the economy is showing signs of resilience. GDP grew faster than expected in the second quarter, while the labour market, though cooling, is stabilising.

Meanwhile, data from Brightmine showed private-sector employers held basic pay settlements steady at 3% in the three months to July, unchanged for the eighth consecutive report.