UK CPI set to show inflation rebounding to four-month high due to higher energy bill
- The United Kingdom’s Office for National Statistics will publish the July CPI data on Wednesday.
- Annual UK headline inflation is set to pick up in July, while core CPI is expected to cool slightly.
- The UK CPI report is set to rock the British Pound as bets on a September interest-rate hike by the BoE build.
The United Kingdom (UK) Office for National Statistics (ONS) will release the high-impact Consumer Price Index (CPI) report for July at 06:00 GMT.
The inflation data could significantly affect market expectations for a Bank of England (BoE) interest rate hike in September, stirring volatility in the British Pound (GBP) as traders assess the impact of energy price swings driven by the Middle East war.
What to expect from the next UK inflation report?
The UK Consumer Price Index is expected to rise 2.9% year-over-year (YoY) in July, up from 2.5% in June. If the reading comes as anticipated by economists, it would be the highest in four months and surpass the BoE’s forecast of 2.8%, moving further away from its 2% target.
Core CPI inflation, which strips out energy, food, alcohol, and tobacco prices, is expected to ease slightly to 2.5% YoY in the reported period.
According to industry experts, official data is expected to show that service inflation, a key measure for BoE policymakers, arrived at 3.4% YoY in July.
Meanwhile, the British monthly CPI is seen rising by 0.3% in the same period after a 0.1% growth in June.
UK inflation risks build as TD Securities flags stickier components and steady BoE
According to TD Securities, “the inflation outlook over the coming months may prove less benign than recent data (energy aside) suggests,” with several components now posing upside risks to the UK’s disinflation narrative. The bank warns that food prices are “vulnerable to a pickup as fertiliser costs and adverse weather conditions feed through to production costs,” while “airfare inflation could also re-accelerate with airlines already suggesting that they will seek to recover higher fuel expenses through post-summer ticket prices.”
TD Securities also notes that “core goods inflation is showing signs of turning higher, with electronics price increases and renewed supply chain pressures reducing the scope for discounting.” Taken together, these “risk factors suggest downside progress in some inflation components could become increasingly difficult to sustain in late 2026,” potentially complicating the path back to more comfortable inflation levels.
How will the UK Consumer Price Index report affect GBP/USD?
Amid signs of a disinflationary trend in the UK, the upcoming CPI data will be critical to gauging whether the trend is reversing and significant enough to nudge the BoE to consider an interest rate hike at its September 17 monetary policy meeting.
It’s the inflation print covering the month of the renewed outbreak of hostilities in the Middle East, which lifted Oil prices up by roughly 22%. Therefore, an uptick in headline British inflation, both monthly and annual, may not come as a surprise.
However, it remains to be seen whether the pick-up in inflation will likely sustain amid still elevated Oil prices, as US President Donald Trump said he has ruled out extending the Iran ceasefire deal.
This matters as BoE Governor Andrew Bailey said in his post-monetary policy meeting press conference in July that "if the Mideast conflict persists and we get second-round effects, we will likely need to raise rates.”
The July Monetary Policy Statement (MPS) read that "risks to inflation forecasts are tilted to upside, but scope remains for outlook to change materially depending on Iran war,” adding that "policy could need to react before inflation persistence risks materialise conclusively."
Back in July, Bailey and company left rates unchanged at 3.75% for the fifth consecutive meeting, as expected. However, the Monetary Policy Committee (MPC) voted 6-3 to hold rates, a more divisive vote than the 7-2 split predicted.
Let’s analyse two main potential scenarios for the UK CPI release.
Hotter-than-expected annual and monthly core CPI readings could lift the odds of a rate hike in September, as markets could view it as an insurance hike by the British central bank. In such a case, the Pound Sterling will receive fresh impetus, likely driving GBP/USD back above 1.3600.
Conversely, a surprise cool-off in core inflation could push back against BoE rate hike bets, checking the pair’s recent uptrend and fuelling a corrective pullback.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD holds a bullish near-term bias as spot remains comfortably above the major daily simple moving averages (SMA) clustered between roughly 1.3380 and 1.3440, suggesting a well-supported uptrend rather than a mere short-covering bounce. The 14-day Relative Strength Index at 62 hints that buyers still retain control.
On the downside, initial support is seen at the confluence zone of the 21-day, 100-day, and 200-day SMAs around 1.3420, forming a dense demand band just below. A deeper pullback would expose the 50-day SMA support at 1.3381, where dip-buying interest would be expected to emerge. Alternatively, recapturing the 1.3600 psychological level is critical to sustaining a meaningful uptrend. The next topside target is seen at the May high of 1.3658,” Dhwani adds.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
