CPI inflation rose to 3.8% in July, up from 3.6% in June and above economists' predictions of 3.7%.
UK inflation is now at its highest level since January 2024, driven largely by seasonal pressures including higher travel and accommodation costs and persistent food price inflation.
On a monthly basis, CPI rose by 0.1% in July, compared with a fall of 0.2% in July 2024.
The latest forecast from the Bank of England shows inflation peaking at 4% in September, up from its previous prediction of 3.7%, before falling back to the 2% target in early 2027.
Industry experts are now divided on whether there will be another cut to Bank Rate before the end of the year.
Lucy Smith, senior investment manager at Killik & Co, said: “The Bank of England is now likely to delay any cuts to interest rates as it remains wary of inflation becoming entrenched. Businesses will remain cautious and consumers will expect to see their household budgets stretched."
Luke Bartholomew, deputy chief economist at Aberdeen, commented: “Inflation was always likely to rise today, but this report is definitely on the hotter side. In particular, services inflation, which the Bank of England watches very closely as a measure of underlying inflation pressure, popping higher will be a source of concern among policymakers. With inflation likely to rise further in coming months and wage growth gradually slowing, it is quite possible we move back to a period of sustained negative wage growth. All of which will keep the economy feeling more “stagflationary” than comfortable. The outlook for interest rates is therefore looking more uncertain. We continue to expect another cut in November, but the risk of a more sustained pause in the cutting cycle has increased.”
Lindsay James, investment strategist at Quilter, added: “All of this makes it incredibly difficult to predict the path of interest rates. The weak growth and fragile state of employment in the UK should enable the Bank of England to cut rates again at least once this year, but if inflation continues its march upwards and gets stuck at any point on the way back down, then policy decisions may need to be backtracked.”
John Phillips, CEO of Just Mortgages and Spicerhaart, agreed: “Another rise in monthly inflation takes us one step closer to 4% - double the bank’s illusive target and where their long-term forecasts suggest inflation will peak. While you can say that inflation is currently playing out according to the Bank’s plan, it still remains ultra sticky, highly unpredictable and totally susceptible to both internal and external economic shocks. It likely explains why the recent interest rate cut was such a knife-edge decision, and yet so necessary to give some form of support to a struggling economy.
“While that 5-4 verdict likely irked many investors and economists, we remain hopeful for at least one more base rate cut this year – although this is totally reliant on how inflation plays out and how much fight the UK economy has left in it. Positive movement all helps towards improving conditions in the mortgage market and enables it to be that key driver in economic growth. While inflation continues to add pressure to households – particularly when doing their weekly shop – we continue to post positive numbers when it comes to buyer registrations, valuation requests or mortgage appointments. Lender innovation and affordability tweaks have certainly helped catch the interest of potential buyers and sellers. So has the proactive approach of brokers to engage with clients early, explore all options and support borrowers in the way that only they can.”
Turning to the impact on mortgage rates, Peter Stimson, director of mortgages at MPowered, said: "This latest jump in inflation will slam the door on the prospect of any meaningful reduction in mortgage interest rates in the coming weeks.
"The mortgage swaps market, which tracks interest rate expectations and is used by mortgage lenders to determine the fixed interest rates they offer to borrowers, had been suggesting that the next base rate cut might come in November.
“But today’s painful jump in inflation means that base rate cut may now be pushed back into 2026, and as a result we are unlikely to see any further rate cuts from lenders in the immediate term.
“Competition between lenders is intense but mortgage rates may well have fallen as far as they can for now. They may even creep up over the next month or so as lenders recalibrate in response to rising swap rates.”
"Matt Harrison, customer success director at Finova Broker, added: “This news on top of the recent Bank of England base rate cut is going to leave many borrowers confused. Further rate cuts are now likely off the cards and mortgage rates hang in the balance. First-time buyers may hold off, but others will be looking to remortgage to lock in a fixed rate before lenders take matters into their own hands. Brokers have a crucial role to play here as many borrowers will be looking for advice on the best deals and when to invest."
