The UK’s inflation rate has unexpectedly risen to 3.8% in the year to July, up from 3.6% in June, according to the latest figures from the Office for National Statistics (ONS). The increase, which brings inflation to its highest level since January 2024, has been driven largely by a surge in summer holiday costs, particularly airfares and hotels, along with persistent rises in food prices.
The news comes just weeks after a deeply divided Bank of England’s Monetary Policy Committee (MPC) voted to cut the Bank Rate to 4.0%, the fifth cut in the last year. This latest inflation data, however, casts a significant shadow over the prospect of further reductions in the cost of borrowing in the near term.
Main drivers of the increase
The ONS highlighted several key factors behind the uptick. A “hefty” 30.2% jump in airfares between June and July was the single biggest contributor, driven by strong demand during the school holidays. This was the largest monthly rise for airfares since the ONS began its current data collection in 2001.
Food and non-alcoholic beverage prices also continued to climb, with the annual rate accelerating to 4.9% in July, up from 4.5% in June. This marks the fourth consecutive month that food inflation has risen, with products like coffee, fresh orange juice, and meat seeing notable increases. Economists suggest that droughts in southern Europe, a key source of fresh produce for the UK, may be contributing to these persistent price pressures.
Transport costs more broadly also played a role. While motor fuel prices are still lower than a year ago, they fell less in July 2025 than they did in July 2024, providing an upward contribution to the inflation rate.
Impact on households and businesses
For households, the latest figures are a renewed blow to living standards. While the overall inflation rate is a long way from the double-digit peak seen in 2022, the price rises for essential items like food and energy continue to squeeze household budgets.
The increase in inflation also has direct consequences for other costs. The Retail Price Index (RPI) measure of inflation, which is often used to calculate future increases in train fares, rose to 4.8% in July. This could lead to a significant jump in regulated rail fares next year, adding to the cost of commuting.
Businesses, particularly small and medium-sized enterprises (SMEs), are also feeling the pressure. Higher operational costs, rising wage bills following the increase in the minimum wage, and the recent National Insurance hike are all tightening profit margins. Industry bodies warn that this combination of factors risks holding back growth and investment.
What this means for interest rates
The Bank of England’s target for inflation remains at 2%. With the latest figures showing the rate moving further away from that goal, the MPC is facing a challenging decision at its next meeting in September.
While some economists believe the Bank may “look through” the latest data, viewing the sharp rise in airfares as a one-off seasonal effect, others argue that the persistent rise in services and food inflation signals deeper underlying issues.
The narrow 5-4 vote to cut rates at the last meeting highlights the existing divisions on the MPC. This new inflation data will likely strengthen the hand of those members who are wary of cutting rates further while price pressures remain stubborn. Financial markets have already reacted to the news, with traders now pushing back their expectations for the next rate cut until well into 2026.
The Bank’s own forecast is for inflation to rise slightly again, peaking at around 4% in September before beginning to ease. However, this latest data underscores the fragile and unpredictable nature of the UK’s inflation battle, suggesting that the path back to the 2% target will be far from smooth.
