Inflation rose more strongly that expected last month, up 3.8% up from 3.6% in June and is forecast to reach 4% by the end of the year.

Office for National Statistics (ONS) chief economist Grant Fitzner said the main driver of inflation was higher air fares, which experienced the largest July increase since the ONS began collecting that data on a monthly basis in 2001.

Economists had expected inflation to rise by 3.7%, though the Bank of England had forecast a 3.76% increase.

The rise is the largest since January 2024 and analysts say it may delay further interest rate cuts.

The Bank’s monetary policy committee last month cut the base rate for a fifth time ito 4%.

However, the narrow decision came after an unprecedented second vote and was accompanied by a statement confirming the committee’s persistent concerns on rising price pressures.  

Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, said: “Following June’s surprisingly strong consumer price pressures, July’s data confirms that inflationary pressures are building towards the Bank of England’s upwardly adjusted 4.0% forecast peak next month.” 

George Holmes, managing director of Aurora Capital, said: “This above expected increase shows that the inflation problem isn’t going away any time soon. It means costs remain stubbornly high for small businesses, and the chance of further relief on borrowing is fading.

“The prospect of interest rates being held for longer is bad news for investment and for firms looking to take on new finance.”

Julian Jessop, economics fellow at the Institute of Economic Affairs, said: “The latest jump in UK inflation to 3.8% in July was not a big surprise – the Bank of England was already expecting an increase to 4% in September. But rising inflation will continue to eat into real incomes and keep bond yields high, adding to the government’s cost of borrowing.

“The biggest contribution to the jump in inflation last month came from transport costs, mainly due to a surge in air fares which can be volatile at this time of year.

“However, there were also large upward contributions from hospitality and from food – two sectors which have been hit particularly hard by rising labour costs in the wake of last October’s Budget.

“The bigger picture is that UK inflation has continued to diverge from the euro area, where inflation has settled at around 2%.

“This divergence is being driven by higher government-set prices (such as domestic energy bills and the national minimum wage), the continued pass through of higher employer taxes, and high housing costs as demand outpaces supply.

“There are still good reasons to expect inflation to start falling in October and drop back to the 2% target in 2026, which is why the Bank of England’s MPC narrowly voted to cut rates at the last meeting.

“In particular, the large increases in food prices will drop out of the annual comparison and the cooling labour market should ease wage pressures. And unlike in the post-Covid period, money growth is relatively subdued.

“Nonetheless, the news of inflation looks set to get even worse before it gets any better.”

Chancellor Rachel Reeves said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living. 

“That’s why we’ve raised the minimum wage, extended the £3 bus fare cap, expanded free school meals to over half a million more children, and are rolling out free breakfast clubs for every child in the country.”

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