UK inflation rises again in new misery for households - what it means for you

UK inflation rose by more than expected in July and remains above the key Bank of England target.

The level of inflation for the 12 months to July was 3.8% - this is higher than the 3.6% that was recorded in June. The majority of economists forecast inflation would hit 3.7% in July.

Inflation is currently at its highest level in 18 months. The Office for National Statistics (ONS) releases inflation data every month and blamed the rise largely on an increase in the price of air fares due to the summer holidays.

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The price of petrol and diesel, as well as food inflation, also went up. Inflation shows how prices have changed compared to 12 months ago. It means families are paying more for these products and items now than what they were a year ago.

The latest forecast from the Bank of England predicts that inflation will peak at 4% in September, which is double its target of 2% inflation.

The Bank of England cut its interest rate - its main tool it uses to keep inflation under control - to 4% at its last meeting earlier this month.

The core rate of inflation, which strips out food and energy, rose from 3.7% to 3.8%. Grant Fitzner, chief economist at the ONS, said: "Inflation rose again this month to its highest annual rate since the beginning of last year.

"The main driver was a hefty increase in air fares, the largest July rise since collection of air fares changed from quarterly to monthly in 2001. This increase was likely due to the timing of this year's school holidays.

"The price of petrol and diesel also increased this month, compared with a drop this time last year. Food inflation continues to climb, with items such as coffee, fresh orange juice, meat and chocolate seeing the biggest rises."

Chancellor Rachel Reeves said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.

"That’s why we’ve raised the minimum wage, extended the £3 bus fare cap, expanded free school meals to over half a million more children, and are rolling out free breakfast clubs for every child in the country. Through our Plan for Change we’re going further and faster to put more money in people's pockets.”

Conservative Shadow Chancellor Sir Mel Stride MP said: “This morning’s news that inflation has risen even higher than the 2 per cent target is deeply worrying for families.

“Labour’s choices to tax jobs and ramp up borrowing are pushing up costs and stoking inflation – making everyday essentials more expensive.

“And with leading economists warning that the Chancellor has blown a colossal black hole in the public finances, families and businesses are bracing for yet more pain come the Autumn Budget.

“Families are paying the price for Rachel Reeves’ economic mismanagement. Britain can’t afford Labour.”

What is inflation?

Inflation shows how the price of goods and services have changed over time. The Consumer Price Index (CPI) is the main measure of inflation.

The ONS calculates inflation based on a regularly updated "basket of goods" and services that represents what households are buying. However, the main CPI figure you see in headlines is used to represent an average.

This means the individual prices of some goods may be higher or lower than this main figure. When inflation is lower, it does not mean prices have stopped rising - it just means they're going up at a slightly slower rate than before.

For example, if the rate of inflation is 3% then it means an item that cost £1 last year would now cost £1.03.

How is inflation linked to interest rates?

The Bank of England increased interest rates over the course of almost two years to try and lower inflation to its 2% target. The base rate influences the interest rate you're offered by banks and lenders.

When it is higher, borrowing becomes more expensive and this means people have less money to spend elsewhere. When people spend less money, this brings down demand and lower prices, which should then lower inflation.

But a higher base rate has pushed up mortgage payments for millions of homeowners, leaving households financially stretched. The base rate stood at just 0.1% in December 2021.

It reached a peak of 5.25% in August 2023 but has since been cut five times to its current level of 4%.

When did inflation reach a peak?

Inflation began to rise in 2021 and peaked at 11.1% in October 2022. The steady increase was largely due to higher costs of energy and food.

Demand for energy increased after Covid and then this was exasperated by the Russian invasion of Ukraine. The war also pushed up food prices, due to rising costs for fertilisers and animal feed.

Inflation fell to its lowest level in three years in September 2024 when it dropped to 1.7% but it started to creep up again the following month in October.