British households are facing a renewed cost of living squeeze, with official figures due this week expected to show inflation climbing to nearly 3% in July. Economists forecast the Office for National Statistics will report a rate of 2.9%, up from 2.6% in June, propelled by a sharp rise in energy bills.
The data arrives as the Bank of England considers whether to raise interest rates from as early as September, amid concerns that stubbornly high inflation could become embedded in the economy. In a separate development, the water regulator Ofwat is reportedly considering plans to introduce “surge pricing” for water usage during droughts. The Daily Telegraph reported that customers could be charged more for water use in summer and less in winter, or face higher prices once they exceed a usage threshold.
The latest snapshot also underscores the challenge facing Andy Burnham’s government, which must ease financial pressure on households and businesses before a difficult autumn budget. The rise in inflation follows Ofgem’s decision to increase its cap on household gas and electricity bills by 13% in July.
Thomas Pugh, chief economist at the accountancy firm RSM UK, said the energy price cap increase would add about 0.44 percentage points to headline inflation, with a decline in petrol and diesel prices providing a partial offset. “The cost of living squeeze is set to return to the headlines,” he said. “[Higher inflation is] adding fresh pressure to household budgets and complicating the outlook for interest rates.”
The continuing conflict in the Middle East is fueling volatility in global oil markets, creating renewed inflationary pressures across the world and amplifying uncertainty about the scale of the economic hit. Britain’s economy, however, has shown more resilience than initially feared. Official figures released last week showed it continued to grow in the first half of 2026 at the fastest pace in the G7, while inflation in June fell by more than expected to 2.6%, down from a peak of 3.8% last year.
Before the outbreak of the Iran war, inflation had been on track to fall to close to 2%. Economists now caution that the conflict’s impact is likely to weigh more heavily in the second half of the year, following the increase in the Ofgem energy price cap. Separate UK jobs market figures due on Tuesday are also expected to reveal a continued slowdown in wage growth.
The Bank of England predicts inflation will reach 3.2% before the year is out, despite government measures designed to limit the impact. In his first week as prime minister, Andy Burnham announced a series of “breathing space” measures to ease the cost of living, including cutting VAT to reduce consumer electricity bills by an average of £45 a year from October. The Bank said this policy, alongside a £2 cap on bus fares in England, would lower the headline inflation rate by 0.1 percentage point.
Threadneedle Street left borrowing costs unchanged last month while warning that further escalation in the Middle East war could drive inflation to a peak of 4.5% by the middle of 2027. City investors are pricing in two quarter-point interest rate rises by the end of next year, with financial markets giving a nearly one in four chance that the first increase, from the current base rate of 3.75%, will come at the Bank’s next policy meeting in September.
Victoria Scholar, head of investment at the financial platform Interactive Investor, said: “Inflation is expected to continue to rise, peaking above 3% later this year, as the UK economy continues to grapple with the backdrop of elevated energy prices and the effective gridlock in the strait of Hormuz. The Bank is likely to carry out roughly one 25 basis point hike by the end of the year as it looks to temper the risk of overheating and help push the inflation rate back in the direction of [its] 2% target.”
