Energy Price Cap Hike Sets Stage for UK Inflation Surge

UK inflation is expected to surge in July, driven by a 13% hike in Ofgem's energy price cap. The average gas and electricity bill has increased by £221 to £1,862 a year, adding 0.5 percentage points to the Consumer Prices Index (CPI) inflation rate.

Economists are forecasting that CPI inflation will rise to 2.9% in July, up from a 15-month low of 2.6% in June and the highest rate since March. This comes as a result of the energy price cap increase alone, according to Investec economist Ellie Henderson.

Victoria Scholar, head of investment at Interactive Investor, is forecasting inflation pain to come, which could force the Bank of England to raise interest rates from 3.75% to 4% by the end of the year. The Bank of England may carry out one 25 basis point hike by the end of the year to temper the risk of overheating and help push the inflation rate back in the direction of the central bank's 2% target.

The heatwaves this summer have also put pressure on food costs, with producers warning that crop shortages will feed into supermarket prices. Economists from the trade group suggest that this will put upward pressure on food inflation going into 2027.