UK Inflation Rebounds to 2.9% in July — Energy Cap Drove the Rise, but Core Inflation Didn't Cool as Hoped

The Office for National Statistics confirmed this morning that headline UK inflation rose to 2.9% in July, up from June's 2.6% — landing exactly where economists at Pantheon Macroeconomics and Deutsche Bank had forecast a day earlier. The headline move itself isn't the surprise here; what happened underneath it is more mixed than the pre-release consensus expected.

The primary driver of the headline rise is exactly what was flagged in advance: Ofgem's energy price cap rose 13% on 1 July, pushing the average dual-fuel household bill to roughly £1,862 a year. That single change pushed gas prices up 14.7% on the month — the sharpest jump since October 2022 — and electricity prices up 3.6%, making housing and household services the largest single contributor to July's inflation rate. Food inflation, by contrast, eased to 1.3% from 1.7%, and transport inflation slowed as diesel prices continued falling, both pulling in the opposite direction. The energy story is real, but it isn't the whole story.

Where the release genuinely diverges from what was expected is core inflation — the measure that strips out food and energy specifically to give a cleaner read on underlying price pressure. Economists had forecast core CPI easing to 2.5%. Instead, it held flat at 2.6%, unchanged from June and hotter than hoped. That matters because a headline number rising while core holds steady rather than cooling is a weaker signal than the pre-release story suggested — it doesn't mean inflation is broadening across the economy, but it's a less clean "one-off energy effect" narrative than economists had been expecting going into today.

Services inflation, the number the Bank of England treats as its clearest read on domestically-generated price pressure, did move in the more encouraging direction: it eased to 3.4% in July, down from June's 3.6%, with softer European air fares among the main drags. That's a genuinely positive signal sitting alongside a less positive one — services cooling is exactly what the Bank wants to see, even in the same release where core inflation disappointed by holding flat rather than easing.

None of this happens in a vacuum for the Bank of England. Back in June, the Bank's own Monetary Policy Report explicitly stated it expected inflation to run "a little under 3%" through the third quarter of 2026. A 2.9% July print lands almost exactly where the Bank already told markets to expect it — a meaningfully different situation from a release that catches policymakers off guard. That said, the flat core reading is the kind of detail that argues for some caution rather than an all-clear: it's not a reason to assume any particular outcome at the Bank's next meeting, but a committee weighing whether underlying price pressure is genuinely fading will have noted that core inflation didn't move the way forecasters expected, even as headline and services both behaved roughly as anticipated.

For households, the immediate effect is straightforward regardless of how the Bank eventually reads the details: energy bills are higher than they were a month ago, by a margin large enough on its own to explain most of today's headline move. Another Ofgem price cap adjustment is already scheduled for October, and continued volatility in Middle East energy markets means the path from here isn't guaranteed to be smooth. The more encouraging services figure is worth holding onto, but today's release is best read as mixed rather than simply reassuring — an energy-driven headline bump exactly as expected, alongside a core inflation reading that quietly missed on the more optimistic side.