UK inflation rises to 2.9% as Iran war fuels living costs squeeze

The UK inflation rate climbed to 2.9% in July, primarily driven by soaring energy costs and surging prices due to the ongoing conflict in Iran, according to the Office for National Statistics. This increase in living costs presents a significant challenge for the government, which is attempting to provide "breathing space" for struggling families.

The Office for National Statistics reported that inflation rose from 2.6% in June, driven by the sharp summer hike in energy charges, which marked the steepest increase in four years. City economists had anticipated an inflation jump to 2.9% following the Middle East tensions. Despite these concerns, the Bank of England is deliberating whether to raise interest rates as early as next month to combat entrenched inflation.

However, recent economic data indicating a slowdown in job market and declining private sector pay growth might dissuade the central bank from initiating rate hikes. Although Britain's economy has demonstrated greater strength than initially anticipated, with the fastest growth rate among G7 nations in the first half of 2026, inflation had started to ease from its peak of 3.8% last year.

The central bank had been on a trajectory to reduce the headline rate close to 2% prior to the Iran war's commencement in late February. While the Bank of England maintained borrowing costs unchanged last month, it cautioned that an adverse outcome, including further war escalation, could push UK inflation to a peak of 4.5% by mid-2027.

Burnham's administration introduced several "breathing space" initiatives upon assuming office, such as reducing VAT and capping bus fares, with the aim of alleviating the cost of living burden on consumers. The Bank of England projected that these measures, coupled with a £2 cap on bus fares in England, would trim the headline inflation rate by 0.1 percentage points.