The United Kingdom (U.K.)’s inflation rate surged to 3.8 percent in July 2025, exceeding both market expectations and the previous month’s figure. Official data released by the Office for National Statistics (ONS) on Wednesday revealed that inflation, measured by the Consumer Prices Index (CPI), rose from 3.6 percent in June to 3.8 percent in July, the highest level since January 2024. Economists had predicted a slightly lower figure of 3.7 percent, making this uptick a notable surprise in economic circles.
The Consumer Prices Index (CPI) rose by 3.8% in the 12 months to July 2025, up from 3.6% in the 12 months to June 2025.
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— Office for National Statistics (ONS) (@ONS) August 20, 2025
Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, also increased to 3.8 percent year-on-year, up from 3.7 percent in June. This signals that underlying price pressures remain persistent beyond the more fluctuating sectors of the economy.
Several factors contributed to this rise in inflation. Transport costs were the largest driver, with prices climbing 3.2 percent compared to 1.7 percent in June. This surge was fueled primarily by a sharp 30.2 percent increase in airfares, likely reflecting the timing of the school summer holidays. Additional upward pressures came from higher costs in motor fuel, sea fares, and roadside recovery services. Inflation also rose in the categories of restaurants and hotels, mainly due to overnight hotel stays, and food and non-alcoholic beverages, which grew by 4.9 percent, up from 4.5 percent in the previous month.
Read more: BoE faces pressure as U.K. inflation nudges higher to 2.2 percent in July on energy cost
Easing housing inflation
Inflation in housing and household services eased to 6.2 percent from 6.7 percent, attributed to softer costs in owner-occupiers’ housing expenses and rents. Despite this modest easing, housing costs remain a significant component of overall consumer inflation.
This inflation uptick comes shortly after the Bank of England’s recent interest rate decision in early August 2025, when the rate was narrowly reduced from 4.25 percent to 4 percent. The central bank characterized this move as part of a “gradual and careful” strategy toward monetary easing. Policymakers were balancing persistent inflation against a softening labor market and signs of modest economic growth. The bank’s Monetary Policy Committee faced a close vote, with a 5-4 majority supporting the rate cut.
Household utility bills have also been a key contributor to inflationary pressures earlier in the year. In April 2025, significant rises in regulated energy and water prices took effect, with the energy price cap increasing by 6.4 percent, raising average annual household energy bills from GBP1,738 to GBP1,849. Water bills jumped by 26 percent, with an average increase of GBP123 annually. Additionally, council tax increases, generally capped at 5 percent without a local referendum, added to household cost burdens.
Elevated wage growth pressures
Wage growth remains elevated around 5 percent, which the Bank of England views as too high for confident inflation control. Employers also face increased costs due to higher minimum wage levels and national insurance contributions implemented in 2025, pressures likely passed on to consumers through rising prices.
Economists warn that the U.K. economy is navigating a delicate balance between stubborn inflation and sluggish growth, with some experts cautioning about the risk of stagflation—stagnant economic growth combined with persistent inflation. The Bank of England expects inflation to reach 4 percent in September 2025, double its 2 percent target, and remain above 2 percent until mid-2027. Despite recent rate cuts, the central bank is signaling a cautious approach to avoid undermining economic recovery while grappling with inflationary challenges.
