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UK’s annual inflation rate jumped to 2.9% in July, up from 2.6% in June, according to official figures from the Office for National Statistics, released on Wednesday. This was mainly due to higher energy bills and was in line with analyst expectations.
The price cap on household energy bills soared 13% last month, driven by the ongoing Middle East conflict.
This was labelled as “the largest rise in gas prices for almost four years” by the ONS.
“A renewed spike in inflation has been expected as the war in the Middle East continues to navigate a clunky ceasefire. Things remain far from normal in the Strait of Hormuz and look unlikely to be resolved any time soon, meaning pressure is likely to remain on prices for the remainder of the year at least,” Jonathan Raymond, investment manager at Quilter Cheviot, said in an email note.
He added: “That said, inflation is expected to moderate in the coming months as government activities begin to take effect on the headline number. Cuts to VAT on energy bills and discounted leisure and hospitality offerings will begin to feed through in official numbers, but unlikely at the pace needed by the Bank of England to feel to start considering rate cuts.”
Services inflation rises
July’s figure was mainly driven by a hike in services inflation, rather than goods inflation. This included actual rents for housing, which increased 4.1% in July, up from 3.4% in June, as well as internet services inflation, which was up 12.1%.
Car insurance inflation was up 8.4%, while mobile phone services was also up 9%. Similarly, July saw increases in care home fees, dental services, education, childcare and the cost of playing sport too.
“Service industries are often labour intensive and rely on large numbers of staff earning the minimum wage, such as in care homes, hospitality and childcare. It means that as the minimum wage rises, so do costs. This has been exacerbated by rising employers’ National Insurance, so service industries have been passing at least some of these costs on,” Sarah Coles, head of personal finance at AJ Bell, said in an email note.
She added: “In addition, different service industries face their own pressures. So for example, rents are up in part because mortgage rates have risen and legislation has become more onerous for landlords, which is being passed on to tenants.”
In contrast, Coles pointed out that childcare costs have risen partly due to demand soaring because of the roll-out of freelance childcare, although staff costs still weigh. The government also does not cover all the cost of funded places, so paid-for childcare is still having to make up the gap.
On the other hand, food inflation fell to 1.3%, with items such as pizza, quiche, butter, jam and honey all seeing price reductions. Similarly, prices also dropped for shoes, men’s clothes, garden furniture and TVs.
July’s inflation report comes as the UK’s new Prime Minister, Andy Burnham, has shared that he will be aiming to reduce cost-of-living pressures through steps such as tax cuts on household electricity prices and bus fare caps.