What caused UK inflation to rise to 2.9% in July, and how is it linked to the Iran war?

UK inflation rose to 2.9% in July from 2.6% in June, driven primarily by a 13% increase in the energy price cap at the start of July, which itself was triggered by the US-Israel war on Iran sending shock waves through global energy markets. The Office for National Statistics explicitly attributed the rise to higher gas and electricity prices — the biggest jump in gas prices since Russia’s invasion of Ukraine in 2022 — alongside smaller-than-usual seasonal falls in furniture and clothing prices due to reduced discounting.

How are policymakers responding to this inflation uptick, and what are the key economic trade-offs highlighted in the article?

The Bank of England is considering raising interest rates as early as next month amid fears that high inflation could become entrenched, while Chancellor John Healey faces a difficult October budget as rising inflation and higher borrowing costs complicate funding for Prime Minister Andy Burnham’s ‘breathing space’ policies — including a VAT cut set to reduce electricity bills by £45 annually from October. At the same time, the Bank acknowledged that a cooling labour market — with slowing wage growth and job vacancies at a five-year low — may limit second-round inflationary effects, leading economists like Ruth Gregory of Capital Economics to still expect inflation to fall to 2% next year, though Threadneedle Street warned a worst-case escalation in the Middle East conflict could push UK inflation to 4.5% by mid-2027.

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UK Inflation Rises to 2.9% as Iran War Drives Up Energy Bills

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UK inflation hit 2.9% in July as energy costs surged due to the Iran war, prompting Bank of England rate hike speculation despite declining crude oil prices.

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