British households have been issued a fresh warning over energy costs as higher gas and electricity bills are expected to push inflation up towards 3%. The latest official inflation figures are due to be published on Wednesday, with economists forecasting that the Consumer Prices Index rose to 2.9% in July.
Energy price cap increase
That would be up from 2.6% in June and comes after Ofgem's energy price cap increased by 13% at the start of July. The rise took the typical annual bill for a household paying by Direct Debit for gas and electricity to around £1,755, although what people actually pay depends on how much energy they use.
Economists believe the jump in household energy costs will have played a significant role in July's expected increase in inflation. Thomas Pugh, chief economist at RSM UK, estimates the higher energy price cap will add around 0.44 percentage points to the headline inflation figure.
Cost of living squeeze
Falling petrol and diesel prices are expected to offset some of that increase. Pugh said: "The cost of living squeeze is set to return to the headlines." Speaking about the prospect of higher inflation, he added that it is "adding fresh pressure to household budgets and complicating the outlook for interest rates."
Energy prices have faced renewed pressure amid volatility on global markets caused by the ongoing conflict involving Iran.
Bank of England forecasts
The Bank of England now expects inflation to reach 3.2% before the end of 2026, despite measures intended to ease some of the pressure facing households. From October, changes to VAT on electricity bills are expected to save households an average of £45 a year.
However, concerns about persistent inflation have also raised questions about the future path of interest rates. The Bank of England kept the base rate unchanged at 3.75% at its latest meeting.
Market volatility
Victoria Scholar, head of investment at Interactive Investor, said: "Inflation is expected to continue to rise, peaking above 3% later this year, as the UK economy continues to grapple with the backdrop of elevated energy prices and the effective gridlock in the Strait of Hormuz." Wednesday's inflation figures will provide the clearest indication yet of how July's energy price increase has fed through to household costs.
