July sees first rise in inflation this year

Inflation rose to 2.2% in July – up from the Bank of England’s (BoE’s) target of 2% in May and June.

The Office for National Statistics’ (ONS) figures were widely expected to show a rise in the cost of living but, in the end, the increase wasn’t quite as much as the 2.3% anticipated.

In reality, prices actually fell in July by 0.2% but the drop was less significant than the 0.4% slide at the same time last year. As a result, the overall rate of inflation increased.

Commenting on the figures, ONS chief economist Grant Fitzner said:

“Inflation ticked up a little in July as although domestic energy costs fell, they fell by less than a year ago.

“This was partially offset by hotel costs, which fell in July after strong growth in June.”

How we got here

Inflation, which measures the rate at which prices rise, soared to 11.1% due to supply chain issues following the global pandemic and Russia’s invasion of Ukraine.

In response, the BoE hiked interest rates to a 15-year high to try and stop people spending and encourage retailers and service providers to drop their prices.

Will increasing inflation mean rising interest rates?

The BoE will take July’s rise in inflation into account when it votes on interest rates in September.

Last month, it reduced rates from 5.25% to 5% - the first cut since the start of the pandemic.

So, will rising inflation see the BoE backtrack? Well, although headline inflation rose in July, service sector inflation fell from 5.7% to 5.2%, largely due to falling hotel prices.

Service sector inflation is watched closely by the BoE’s interest rate setters. The fall in inflation in this area and the fact the BoE has said it's expecting overall inflation to rise to 2.75% before falling back again mean it’s probably unlikely the latest figures will result in undue panic and interest rates going up again.

What the politicians are saying

Shadow chancellor Jeremy Hunt claimed the data shows there is “more to be done to keep inflation down”.

While chief secretary to the Treasury Darren Jones said:

“The new government is under no illusion as to the scale of the challenge we have inherited, with many families still struggling with the cost of living.

“That is why we are taking the tough decisions now to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”