UK Inflation Rises Sharply

Surprise Increase Sparks Mortgage Warnings and Interest Rate Uncertainty

Inflation Surpasses Expectations Again

UK inflation rose more than expected in July, climbing to 3.8%, according to the Office for National Statistics (ONS). Economists had predicted a smaller increase to 3.7%, following a June figure of 3.6%. The surprise uptick has raised fresh concerns about the outlook for interest rates, mortgage costs, and consumer spending.

Core inflation — which strips out the more volatile food and energy prices — also increased to 3.8%, adding pressure to the Bank of England’s policy stance.

Economists now forecast inflation could hit 4% by the end of 2025, moving further away from the Bank’s long-term target of 2%.

Impact on Mortgage Rates: Further Cuts in Doubt

Mortgage holders hoping for relief may need to rethink their strategy. The recent trend of falling fixed-rate mortgages could be slowing — or even reversing.

Key Points:

• Two-year fixed mortgage rates recently fell below 5% for the first time since 2022.
• Lenders had been pricing in interest rate cuts, pushing mortgage rates down gradually.
• The higher-than-expected inflation may change this trend.

David Hollingworth of L&C Mortgages warned:

“Borrowers should be watching closely. Those waiting for deeper cuts may want to secure a deal now, to hedge against possible increases.”

Peter Stimson, director at MPowered Mortgages, added:

“The inflation jump may slam the door on meaningful mortgage rate cuts in the near term. A base rate cut may be pushed back into 2026.”

Mortgage competition remains strong, but some analysts now suggest that we may have already seen the bottom of current rates.

Will Interest Rates Be Cut in November?

Despite the inflation data, analysts at Capital Economics believe that a Bank of England base rate cut in November is still likely — though it will be a “close call”.

While rising inflation usually leads to higher interest rates to curb spending, some economists argue the July rise was largely driven by temporary factors, including:

• An “Oasis bump” from the band’s reunion tour boosting travel costs.
• Higher airfares during the school holidays.

Ruth Gregory, Deputy Chief UK Economist at Capital Economics, stated:

“The Bank of England expected this bump in CPI. The bigger concern is persistent food inflation, now at 4.9%.”

Still, any delay in interest rate cuts may mean prolonged higher borrowing costs for consumers and businesses.

UK Still Leads G7 in Inflation Rates

The UK remains the highest-inflation economy in the G7:

• US, Canada, France, Germany and Italy all posted lower inflation than the UK in July.
• Japan’s June inflation stood at 3.3%.
• The Eurozone is also experiencing lower price rises compared to the UK.

This suggests the UK economy is under unique inflationary pressures — possibly due to lingering Brexit-related frictions, wage growth, and domestic supply chain issues.

Conclusion: A Turning Point for Borrowers and Policymakers?

July’s inflation data could mark a turning point. While the Bank of England may still cut interest rates later in the year, the path is less certain. For households and investors, this means:

• Mortgage rates may remain higher for longer.
• Planning for interest rate volatility is essential.
• The UK economy may continue to face greater inflation risks than its G7 peers.

With the next Bank of England decision due in mid-September, all eyes will be on future inflation data and wage trends to see whether the outlook stabilises — or deteriorates further.

Sources: (Skymoney.com, BBC.co.uk)