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Inflation Warning Lights Flashing

Inflation Image by Markus Winkler from Pixabay

Data from the Office for National Statistics showed the annual rate of CPI inflation rising to 3.8% in July 2025, up from 3.6% in June

Stuart Morrison, Research Manager at the British Chambers of Commerce said:

“The inflation warning lights continue to flash, with July’s rate being slightly higher than most analysts had forecast. Prices are now rising at the fastest rate since the start of 2024, with little sign that inflation will be near the Bank’s target of 2% anytime soon.

“Our surveys show inflation remains a real concern for over half of SMEs. Businesses tell us national insurance, wage growth and tariffs are all bubbling away in a cauldron of price pressures. While many firms are desperate to see further interest rate cuts, there’s now growing concern that persistent inflation will limit the scope for further reductions.

“It’s vital that policymakers ease the cost pressures on business. Our message to the Chancellor is clear – no new tax rises on business in the Budget. Firms can’t drive forward economic growth if they are continuing to face cost pressures from several directions.”

Martin Sartorius, Principal Economist, CBI, said:

“Inflation ticked up slightly in July, broadly in line with the Bank of England’s expectations. Higher energy and regulated prices continue to put upward pressure on inflation, and the increase in labour costs following last year’s Autumn Budget are also feeding through.

“Today’s inflation data will reinforce the Monetary Policy Committee’s cautious approach to cutting interest rates going forward. While inflation is projected to ease next year, the risk of second-round effects means that the MPC will not race to loosen policy in the near term. We expect that the MPC will keep rates unchanged in September, as it waits to see how inflation and labour market data develop going into the autumn.”

Anna Leach, Chief Economist at the Institute of Directors, said:

“Inflation has risen again this month – slightly ahead of consensus but in line with the Bank of England’s expectations. Both goods and services inflation rose in July, with the latter pushed higher than expected, with airfares rising by a chunky 30.2%, alongside a fourth consecutive rise in food inflation to 4.9%. UK inflation has also notably diverged substantially from our European peers since April due to higher energy and utility bills, and rising employment costs.

“The MPC’s recent vote split rightly highlights concerns about the stubbornness of UK inflation. CPI is set to reach 4.0% in September – twice the target – with the pressure coming from the parts of the basket most felt by consumers. While this spike is expected to be temporary, inflation is not expected to be back within the target range until the second half of 2026. That raises a real risk that elevated inflation feeds into expectations and generates second-round effects. September’s rate decision is expected to be a hold, but don’t be surprised if sticky inflation puts paid to further rate cuts this year.”

Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, said:

"The latest jump in UK inflation to 3.8% in July was not a big surprise - the Bank of England was already expecting an increase to 4% in September. But rising inflation will continue to eat into real incomes and keep bond yields high, adding to the government’s cost of borrowing.

"The biggest contribution to the jump in inflation last month came from transport costs, mainly due to a surge in air fares which can be volatile at this time of year.

"However, there were also large upward contributions from hospitality and from food – two sectors which have been hit particularly hard by rising labour costs in the wake of last October’s Budget.

"The bigger picture is that UK inflation has continued to diverge from the euro area, where inflation has settled at around 2%.

"This divergence is being driven by higher government-set prices (such as domestic energy bills and the national minimum wage), the continued pass through of higher employer taxes, and high housing costs as demand outpaces supply.

"There are still good reasons to expect inflation to start falling in October and drop back to the 2% target in 2026, which is why the Bank of England’s MPC narrowly voted to cut rates at the last meeting.

"In particular, the large increases in food prices will drop out of the annual comparison and the cooling labour market should ease wage pressures. And unlike in the post-Covid period, money growth is relatively subdued.

"Nonetheless, the news of inflation looks set to get even worse before it gets any better."