UK inflation rose to 2.9 per cent in July, up from 2.6 per cent in June, according to the latest figures from the Office for National Statistics (ONS). The increase means inflation remains above the Bank of England's 2 per cent target, with higher gas and electricity costs adding pressure to household finances.
Energy bills increase
Energy bills increased in July following a 13 per cent rise in Ofgem's price cap, which Standard Life estimates is equivalent to around £18 extra each month for a typical household.
Jenny Holt, Customer Savings and Investment Director at Standard Life, said the latest inflation increase was an "unwelcome reminder that the cost-of-living squeeze hasn't gone away".
She explained: "The 13% increase in Ofgem's energy price cap from July is feeding higher bills into household budgets, with the increase equivalent to around £18 a month for a typical household. With inflation at 2.9%, everyday costs are still rising faster than the Bank of England's 2% target."
Ms Holt warned that prolonged hot and dry weather could put further pressure on some food prices later in the year. She added: "When more of the monthly budget is absorbed by essentials such as energy and food, it can also become harder for people to put money aside, whether that's building emergency savings to cover unexpected costs or contributing towards longer-term goals like saving for retirement."
Interest rates and mortgages
The latest inflation figure will also be closely watched for what it could mean for interest rates. Hal Cook, senior investment analyst at Hargreaves Lansdown, said that while inflation remains above the Bank of England's target, other economic indicators could make policymakers more cautious about increasing rates.
He said: "While inflation remains ahead of the Bank of England's 2% target, the case for rate rises is tempered by the wider economic picture. Unemployment has edged higher, payroll numbers are falling and vacancies have continued to decline, all pointing to a softer labour market."
Mr Cook said financial markets had been pricing in a relatively high chance of interest rates reaching 4 per cent by the end of 2026. However, the Bank of England's latest decision was split six to three in favour of keeping rates unchanged, with three members voting for an increase.
Higher inflation can be unwelcome news for mortgage borrowers because persistent price pressures can reduce the scope for lower interest rates. Alice Haine, head of personal finance at Hargreaves Lansdown, said two and five-year swap rates - which can influence the pricing of fixed mortgage deals - have moved higher. However, competition between lenders has resulted in some mortgage rate reductions this week.
Ms Haine said: "Those coming off shorter fixed-rate deals taken out when borrowing costs were higher may still find better options. But homeowners rolling off ultra-low five-year fixes could face a significant jump in repayments, making early planning essential."
Impact on savings
The latest figure also provides a useful benchmark for savers because money needs to earn at least the rate of inflation to maintain its spending power before tax is taken into account. For example, £1,000 kept somewhere paying no interest would still show a balance of £1,000 after a year, but if prices continued rising by 2.9 per cent, that money would buy less than it does today.
Ms Haine said: "Inflation is never good news for savers. Even if it slows the fall in cash rates, rising prices still erode the real value of interest earned and reduce spending power over time."
She urged people to check the interest rate currently being paid on their savings, particularly if money has been sitting in the same account for some time. Tax may also need to be considered when comparing returns, as interest earned outside tax-free accounts such as ISAs can count towards an individual's Personal Savings Allowance.
While inflation is substantially below the levels experienced during the height of the cost-of-living crisis, a rate of 2.9 per cent does not mean prices have fallen. It means prices overall are continuing to rise, but at a slower pace than during periods when inflation was significantly higher.
Ms Haine said: "Families may not be facing the extreme pressure seen during the cost-of-living crisis, but food, fuel, energy and housing costs continue to absorb a large share of monthly budgets. Any renewed rise in inflation will be unwelcome for households still adjusting after several years of higher prices."
