Inflation rises to 2.2% for the first time this year, a blow to next month's interest rate cut

UK inflation rose to 2.2 percent in July, marking the first rise this year and raising the chances that the Bank of England will keep interest rates on hold when it meets next month.

Consumer Price Index (CPI) inflation rose from 2 percent in June, but was below economists' expectations who had forecast it would rise to 2.3 percent.

However, even though the rise in inflation was smaller than expected, it is still above the Bank's 2 percent target and casts doubt on the possibility of consecutive interest rate cuts at the September meeting.

Services price inflation, according to the CPI, which the Bank closely monitors, fell more than expected, from 5.7 percent in the previous month to 5.2 percent in July.

“Inflation rose slightly in July as household energy costs fell, but did so by less than a year ago. This was partly offset by hotel costs, which fell in July after strong growth in June,” said Grant Fitzner, chief economist at the ONS.

The latest figures mean prices are rising faster across the country than in previous months, but still at a slower pace than in 2022 and 2023, when households and businesses were hit during the peak of the cost crunch.

The lower-than-expected rise in inflation comes after the Bank's monetary policy committee voted in early August to cut interest rates to 5 percent, a quarter-point reduction.

Economists predict the slight pick-up in inflation could mean policymakers at the Bank will decide to keep interest rates on hold, but anticipate further cuts before the end of the year.

Ruth Gregory, deputy chief UK economist at consultancy Capital Economics, said: “The smaller-than-expected rise in CPI inflation from 2.0% in June to 2.2% in July (consensus 2.3%, EC 2.1%, BoE 2.4%) and the sharp fall in services inflation from 5.7% to a two-year low of 5.2% will reassure the Bank of England that the disinflation process is underway and open the door to further interest rate cuts later this year.”

Sarah Coles, personal finance director at Hargreaves Lansdown, said the rise in inflation was “not very welcome, especially for people hoping to enjoy the new space in their budgets created by pay rises, but it's not a huge surprise either”.

“It is likely to be business as usual at the Bank of England in September, with rates unchanged, so this is unlikely to significantly alter the outlook for savers and borrowers,” he said.

Luke Bartholomew, deputy chief economist at fund manager Abrdn, said the fall in the services inflation rate “should help reassure some policymakers that inflationary pressures are proving slightly less persistent than feared”.

“Following yesterday’s strong labour market report, the Bank will be in no rush to cut rates again immediately, but the current slowdown in inflation pressures means there is certainly scope for at least one more rate cut this year.”

The bank has said it expects inflation to rise to around 2.75 percent in the second half of this year amid persistent price increases in the services sector.

Inflation will then fall in subsequent years to 1.7 percent in 2026, it predicted earlier this month, and then to 1.5 percent in 2027.

Darren Jones, Chief Secretary to the Treasury, said: “The new Government is under no illusions about the scale of the challenge we have inherited, with many families still struggling to cope with the cost of living. That is why we are taking tough decisions now to fix the foundations of our economy so that we can rebuild Britain and make life better for all parts of the country.”