Food and transport, in particular airfares, were some of the driving forces behind the new inflation rate. James Smith, Research Director at the Resolution Foundation, said: “UK inflation looks increasingly like an international outlier as CPI stepped up again in July to reach 3.8 per cent, a nineteen-month high, with a worrying increase in the inflation rate of essentials.
“The rising cost of food is particularly concerning for families as it comes on in the wake of a period of steep increases in the cost of essentials and rising food-bank use. But it is also bad news for mortgagors, as it will most likely slow the arrival of future rate cuts.”
The UK's inflation rate is now significantly higher than its European counterparts. France recorded an inflation rate of 0.9% over the same period, while Germany recorded an inflation rate of 1.8%
Why did inflation rise in July?
Several factors influenced the higher than expected inflation increase in July. Among them were transport and food.
Transport, with air fares in particular, was responsible for the largest upward contribution to inflation this year. Air fares rose by 30.2% between June and July 2025. To put it into context, this time last year, air fares only rose by around 13.3%. The significant increase is likely due to this year's school holidays timing, so it may be a temporary blip rather than an ongoing pattern.
Danni Hewson, AJ Bell head of financial analysis, said: "Households didn’t need the official data to know that many prices have been edging up again, stretching already tight budgets. Everyone’s inflation experience will be different, but all those parents who saved for months to take the family on a post-school break will have had first-hand experience of one of the main drivers of July’s larger-than-expected jump.
"It always feels unfair when you watch airfares shoot up on the first day of parents’ six-week summer window, and it’s notable that with the holidays falling earlier in July this year, the cost of a week in the sun would have been subject to that school holiday premium and reflected in this month’s figures."
But while the increase in air fares may only be temporary, the increase in food and non-alcoholic beverages points to a wider trend. This category rose by 4.9% in the year to July, up from 4.5% in the year to June. It marks the fourth consecutive increase in the category, and the highest since February 2024. Food items like beef, sugar, jam, honey and chocolate, as well as drinks like coffee, tea and cocoa were mainly to blame for the annual increase.
What does July's inflation figure mean for the Bank of England base rate?
The rise in inflation means the Bank of England may be more cautious with cutting interest rates moving forward. While the 3.8% inflation rate increase is in line with the Bank's predictions, it's still well above its target of 2%. As a reminder, the last base rate cut took place on the 7th of August when the Monetary Policy Committee voted to cut the rate by a quarter percentage point from 4.25% to 4%.
While the market is pricing in one more rate cut in 2025, the recent inflation news coupled with the fact that inflation is expected to peak at 4% in September, mean this may not happen after all. Craig Rickman, Personal Finance Expert at interactive investor, added: "Unless something changes dramatically over the coming weeks, it seems inevitable the Bank of England will continue its cautious approach to loosening monetary policy and keep interest rates on hold when policymakers announce their next decision on 18 September.”
Susannah Streeter, head of money and finance at Hargreaves Lansdown, is even less optimistic. She said: "Although the pattern of spending in July may end up being more temporary, the rise in the headline rate is set to keep Bank of England policymakers cautious...
"Borrowers look set to need lots more patience, given another interest rate cut is not likely in the next few months, it’s touch and go for December, with a reduction not fully priced in by financial markets until the spring."
The latest interest rate predictions suggest that rates will fall to around 3.81% in January 2026. If you're interested in finding out more, check out our article on the latest UK interest rate predictions.
How will the rise in inflation affect mortgages and savings?
Increases in inflation are a double-edged sword when it comes to your savings. While an increase in inflation points to the base interest rate (and therefore savings rates) remaining higher for longer, savings are also eroded when inflation rises as Alice Haine, personal finance analyst at Best Invest, points out: "An uptick in inflation won’t be welcomed by savers. While higher inflation may slow the pace at which top savings rates disappear – assuming interest rate cuts are delayed – the downside is that rising prices erode the real value of returns.
“Savings rates have already eased back significantly following five BoE rate cuts since last summer – a trend presenting a major challenge for real returns...with savings rates likely to fall back further in the months ahead, shopping around for the best deal is key."
High street banks are paying around 2% interest on average for their easy access savings accounts; this below-inflation interest rate has the potential to eat away at your savings over time. That said, some of the best savings rates on the market currently are inflation-beating. The best easy access savings accounts pay up to 5% while 5-year fixed rate bonds currently offer the best deals with a savings rate of up to 4.52%. Take a look at our round-up of the best savings accounts in the UK right now if you're in the market for a new savings account.
The rise in inflation won't be welcome news for those in the market for a mortgage either. A combination of factors, including predictions of inflation peaking at 4%, mean there may not be another base rate cut later this year after all.
Ms Haine added: "Rising inflation puts a spanner in the works for those hoping for mortgage rates to ease more dramatically. Persistent price pressures may cause the central bank to delay further easing. While affordability has improved for buyers in recent months, thanks to lower mortgage rates and lenders relaxing their stress test rules, rates may not be easing as fast as people hoped."
The best two year fixed-rate mortgage deals on the market currently come with interest rates as low as 3.73%. The best five year fixed rate mortgages, on the other hand, offer rates as low as 3.85% for those with a loan-to-value ratio of 60%. Tracker rates are as low as 4.11% for a two-year tracker deal, or 4.60% for a 5-year tracker deal. For an overview of current mortgage deals, take a look at our round-up of the best mortgage rates in the UK.
The decision whether to fix your mortgage or choose a tracker deal is personal to an extent. However, if you're struggling with the decision, take a look at our article on remortgaging in 2025 where Damien analyses whether now's the right time to fix your mortgage.
What to do if you're struggling to pay your bills
Essential household bills are on the rise. Food bills, in particular, are part of the reason for the increase in inflation in July. Many households are struggling to keep pace with inflation. However, there's help available if you're struggling.
If you think you might fall behind on your household bills, the best thing to do is to reach out to the relevant supplier in the first instance. If you explain your situation, there will typically be steps they can take to help you come up with a payment plan that works for both parties.
It's also a good idea to make sure you're claiming all the support you might be entitled to. You can check your eligibility for various benefits through the website entitledto.
We also have several articles that may be more specific to your situation and could offer further help:
- How to save money on your energy bills
- How to save money on your water bills
- How to save money on your mortgage
- How to save money on your council tax
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