What increasing inflation means for you: CPI accelerates to 2.9% – what occurs subsequent?

Inflation accelerated to 2.9 per cent in July following the increase to the energy price cap, according to figures from the Office for National Statistics.

The Consumer Prices Index (CPI) for July came in at 2.9 per cent, up from 2.6 per cent in June, driven by the 13 per cent increase in the energy price cap.

Core CPI, which excludes energy, food and alcohol, stayed at 2.6 per cent in July, while services inflation eased from 3.6 per cent to 3.4 per cent.

What do the latest inflation figures mean for you? Where does this leave the Bank of England on interest rate hikes, and will inflation stay above the central bank’s target? We look at all this and more.

What’s the latest on inflation?

The headline inflation rate came in as expected, driven by a boost in energy prices, which was partially offset by lower fuel and food prices.

The government’s temporary VAT cut over the summer passed through to prices less than economists expected, with catering services and recreation and cultures both rising month-on-month.

Housing and household services, and furniture made the biggest contribution to the monthly increase.

But there was some good news buried in July’s inflation, as the monthly increase in food prices was its lowest since September 2021. Food inflation

Food inflation rose by 1.3 per cent in the 12 months to July 2025, down from 1.7 per cent in June.

Core inflation stayed level at per cent, while pressure eased on services inflation, falling from 3.6 per cent in June to 3.4 per cent in July, in line with the Bank of England’s projection.

ONS Deputy Director for Prices Mike Hardie said: ‘Inflation rose in July, driven by a sharp increase in gas prices following this month’s change to the energy price cap. 

‘This was the largest rise in gas prices for almost four years. ‘Other upward pressures included furniture prices falling by less than usual for this time of year, and also a smaller fall for clothing prices due to reduced discounting.

‘The prices of raw materials and goods leaving factories slowed again, driven by a drop in the prices of crude oil and refined petroleum respectively.’

What does the inflation rate mean for you?

Consumer prices inflation, known as CPI, measures the average change in the cost of consumer goods and services purchased in Britain, with the ONS monitoring a basket of goods representative of UK consumers.

Monthly change figures are given but the key measure that is watched is the annual rate of inflation. The Bank of England has a target to keep this at 2 per cent. 

An inflation spike has hit over the last two years or so, with the CPI rate peaking in October 2022 at 11.1 per cent. 

Higher inflation means the rate of increase in the cost of living is increasing.

Any decline in the inflation rate is to be celebrated though, as it increases the chance of wages, investment returns and savings interest matching or beating inflation – delivering a real increase in people’s wealth.

> The best inflation-fighting savings deals 

The main measure by which the Bank of England seeks to control inflation is interest rate rises. Higher inflation decreases the chance of base rate cuts and increases expectations of how high rates will go. 

Expectations that the Bank of England would have to keep raising rates to combat inflation have sent mortgage rates spiralling costing mortgaged homeowners dear.

> How much would a mortgage cost you? Check the best rates 

Will inflation rise again? 

A jump in the headline inflation rate is in line with expectations, as economists pointed to the impact of a higher energy price cap, and the wider fallout from the ongoing Iran war.

June’s lower headline inflation rate had been expected to be a blip as the resumption of hostilities in the Middle East start to push oil prices back to around $90 a barrel.

The closure of the Strait of Hormuz, which does not look set to be resolved soon, means pressure is likely to remain on prices.

‘Inflation is likely to rise further over the coming months as earlier increases in oil and gas prices feed through to household bills and firms’ costs,’ says Martin Beck, chief economist at WPI Strategy.

The heatwave and subsequent drought will add pressure to food production and supply chains later this year too, economists warn.

However, the inflationary impact of the Iran war has not been as severe as some had feared. While the headline rate has increased, it has yet to spill over into broader price pressures.

James Smith, economist at investment bank ING says there’s ‘scant evidence so far – beyond energy prices – that the war in Iran is having a tangible impact on inflation.’

Looking ahead, Beck does not expect headline inflation to peak much above 3 per cent, as the temporary removal of VAT on energy bills in October will knock around 0.1 percentage points off CPI.

Smith expects inflation to peak around 3.2 per cent, assuming food prices start to rise again.

Beck adds: ‘The inflation outlook will nevertheless involve some pain for households, particularly as private-sector pay growth slows. Even a temporary period of higher inflation leaves a permanent mark on the price level. Families will therefore face a lasting increase in the cost of living, squeezing real incomes and spending and adding to the risks of weaker growth and higher unemployment.’

Will the Bank of England raise interest rates?

Inflation remains above the Bank of England’s 2 per cent inflation target, which means markets are expecting some modest tightening later this year.

Smith says inflation will need to reach 4 per cent before the Bank ‘seriously considers rate hikes’.

It is watching for second-round effects which have, so far, failed to materialise meaningfully.

Grim faces: The Bank of England is likely to hold the base rate next month after CPI reading

Beck adds ‘The fact that higher energy prices have so far failed to trigger the kind of second-round effects that could turn a temporary inflation shock into something more persistent should offer some reassurance to the Bank of England’s more hawkish policymakers. It also keeps alive the prospect of an interest-rate cut before the end of the year.’

Smith expects the Bank to remain cautious and continue to keep rates on hold this year.

Meanwhile, Felix Feather, economist at Aberdeen says: ‘Given evidence of a slowdown in underlying domestically generated inflation (as opposed to more internationally driven goods such as energy commodities) and soft labour market conditions, we see the Bank on hold for the rest of the year.’

What does it mean for your savings?

Inflation can quickly erode the real value of people’s savings.

With economists expecting the Bank to hold rates, with the likelihood of just one hike later this year, it spells good news for savers.

When rate expectations rise, swap rates rise and so too do fixed savings rates. However, the market moves slowly so it may take some time for there to be meaningful movement.

One-year fixed rate bonds offer 4.85 per cent, according to Moneyfacts, 4.87 per cent if you fix for two, and 5 per cent for five.

> Check the best savings rates in This Is Money’s independent tables

What does it mean for your mortgage?

While the Bank of England is likely to hold off on raising rates for now, mortgage rates continue to move higher.

Alice Haine, head of personal finance at Hargreaves Lansdown says: ‘For mortgage holders, the concern is that stickier inflation limits the scope for interest rate cuts. Two- and five-year swap rates have moved higher, which can feed into mortgage pricing, although competition among lenders hasl led to some rate cuts this week.

‘Those coming off shorter fixed-rate deals taken out when borrowing costs were higher may still find better options. But homeowners rolling off ultra-low five-year fixes could face a significant jump in repayments, making early planning essential.’

> Compare the best mortgage rates based on your home’s value and loan size