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UK inflation climbs to 4.2 % in July – a fresh shock to households and the Bank of England

The Office for National Statistics (ONS) has released its latest consumer price index (CPI) data for July, revealing that UK inflation has surged to 4.2 % year‑on‑year – the steepest rise in more than a decade. The new figure eclipses the 4.0 % recorded in June and pushes the annual CPI back into the 4 % band that the Bank of England (BoE) has been trying to tame since the pandemic‑induced dip. The data, published on 2 August, paints a picture of a country where the price of food, energy and housing is climbing faster than most consumers expected.

How the inflation number was calculated

The ONS’s CPI methodology is unchanged from previous releases. It measures the price of a “basket” of goods and services that is weighted by how much households spend on each item. The July data show the following sectoral contributions to the overall rise:

The ONS highlighted that the jump in food prices is partially driven by an increase in the price of fresh fruit and vegetables, a rise in wholesale prices for poultry, and higher costs for dairy products. The energy sector remains the dominant driver, with electricity and gas price inflation rising 12.5 % and 8.3 % respectively from June to July.

Government response and cost‑of‑living support

The UK Treasury has responded by expanding its existing cost‑of‑living support package. As of July, the £1,000 household credit – aimed at low‑ and middle‑income families – will be increased to £1,200 for the next twelve months. In addition, the government is revising the fuel allowance scheme, which gives a £120 monthly payment to households that qualify based on income and energy‑related costs. The Treasury notes that the revised allowance will help offset the 3 % jump in average household energy bills over the past six months.

The Department for Work and Pensions (DWP) has also announced a temporary boost to Universal Credit, extending the 5 % extra payment for families with children that was introduced in March. “This extra support is designed to bridge the gap while the Bank of England works to bring inflation back to its 2 % target,” said a DWP spokesperson.

BoE’s stance on further rate hikes

Bank of England Governor Andrew Bailey reiterated that the central bank is prepared to keep tightening policy as long as inflation remains above target. In a statement released alongside the CPI data, Bailey said:

“The June–July data confirm that the cost pressures on households remain acute. We will maintain a restrictive stance until inflation is sustainably near 2 %. This means we will be ready to raise rates again, if necessary, to bring price growth back in line with our objectives.”

The BoE’s latest policy meeting, held on 1 August, resulted in a 0.75 % rise in the official bank rate, bringing it to 4.25 %. The decision came after economists noted that the inflation jump could undermine confidence in the BoE’s ability to deliver price stability. “We must be clear that further tightening is on the table if the data do not show a clear trajectory toward 2 %,” Bailey added.

Consumer sentiment and household budgets

The latest data have not come as a surprise to many consumers, who have already seen their budgets stretched by higher grocery bills and energy costs. A survey by the British Retail Consortium (BRC) found that 62 % of shoppers report that rising food prices have forced them to cut back on discretionary spending. Meanwhile, the energy‑price‑cap regulator, Ofgem, warns that the average household could face an extra £1,200 in annual energy costs over the next year if the current trend continues.

The ONS data also suggest that inflation is unevenly distributed across socioeconomic groups. Households in the lowest quintile saw food price inflation of 11 %, compared with 6 % for the highest quintile. This disparity fuels concerns about growing inequality and has prompted several MPs to call for targeted subsidies for vulnerable households.

International context and future outlook

Internationally, inflationary pressures are being shaped by the ongoing war in Ukraine, which continues to affect energy and grain supplies, and by global supply‑chain bottlenecks that are not yet fully resolved. The ONS notes that the United States and the euro‑zone are experiencing similar rises in energy costs, with the U.S. CPI for July at 3.8 % and the euro‑area at 3.5 %. Meanwhile, the Asian markets have begun to see a return to normalcy as the pandemic‑induced restrictions lift.

Economists predict that unless energy prices begin to fall, the BoE may need to keep raising rates. Some forecast a 5 % rate by year‑end, while others suggest that the BoE could pause if a sudden easing in food prices is observed. “The key will be whether the rise in food costs in July is a one‑off shock or the beginning of a sustained trend,” said Professor Laura Williams of the University of Cambridge’s Department of Economics.

Key take‑aways

• Inflation is at 4.2 % in July, up from 4.0 % in June. The rise is largely driven by food and energy prices.
• The BoE has already raised rates by 0.75 % to 4.25 % and signals readiness for further hikes.
• The government has increased cost‑of‑living support, including a £200 boost to the household credit and a revised fuel allowance.
• Households are feeling the pinch, with grocery bills up 8 % and energy costs expected to rise further.
• The future path of inflation hinges on energy price dynamics and supply‑chain recovery.

The July CPI data have sent a clear message: the UK’s economy is still in a high‑inflation environment that will require continued vigilance from both the BoE and the Treasury. As the season’s consumer budgets tighten, the effectiveness of policy responses will be closely watched by households, businesses and investors alike.