UK Inflation Hits 2.9% as Iran War Drives Energy Costs

UK annual inflation rose to 2.9% in July, up from 2.6% in June, marking the highest level since March. The Office for National Statistics attributed the increase primarily to a 13% hike in the energy price cap, which raised average annual bills by £221 to £1,862. This surge was driven by the largest rise in gas prices in nearly four years, linked to the war in Iran and the closure of the Strait of Hormuz shipping route.

Other upward pressures included reduced discounting on clothing and furniture, while record heatwaves damaged crops across the UK and Europe. Conversely, food inflation cooled to a five-year low of 1.3% due to supermarket competition, and services inflation eased slightly to 3.4%.

Prime Minister Andy Burnham and Chancellor John Healey responded by pledging cost-of-living relief, including a VAT removal from electricity bills starting in October and a £2 bus fare cap. Healey stated that the Iran war "continues to impact prices here at home," though he maintained that the economy remains resilient. Shadow Chancellor Sir Mel Stride criticized the administration, claiming Labour's economic mismanagement left the UK unprepared for global shocks.

The Bank of England has maintained interest rates at 3.75% despite the uptick. While some analysts predict inflation could peak at 3.5% by the end of 2026, others suggest the central bank may hold rates steady in September due to a cooling labor market and slowing private sector earnings growth.