Inflation rises to 2.9% as energy bills push up prices – what it means for your money

THE UK’s inflation rate has increased to 2.9%, its highest level since March, official figures show. Inflation is a measure of how fast the costs of goods and services are rising. It was at 2.6% in the 12 months to June, so today’s figures represent a small increase. Meanwhile, households could be in for more pain as the Bank of England expects inflation to rise above 3% later this year. Sign up for the Money newsletter Thank you! Mike Hardie, deputy director for prices at the ONS, said: “Inflation rose in July, driven by a sharp increase in gas prices following this month’s change to the energy price cap. “This was the largest rise in gas prices for almost four years.” Energy bills increased by 13% last month after industry regulator Ofgem pushed up its cap by £221 to £1,862 a year. He added that other upward pressures included furniture prices falling by less than usual for this time of year and also a small drop for clothing prices due to reduced discounting. Chancellor of the Exchequer, John Healey, said: “Iran war inflation continues to impact prices here at home, but Britain’s economy is resilient. “We have cut VAT on electricity bills and capped bus fares at £2 – to give breathing space to those feeling the strain. Most read in Money “There is more to do to restore hope and build a stronger economy where prosperity is shared more fairly across Britain.” What it means for your money Inflation measures the rate at which the cost of goods or services is rising or falling. It impacts your spending power and how far your money can go. Rising inflation means prices are increasing at a faster rate, pushing up grocery and household bills. If inflation stays high for a long period then the Bank of England may decide to hold interest rates to try and bring it back to its 2% target. This could mean that the cost of your mortgage increases and it costs more to borrow money. Inflation is expected to continue to rise and peak above 3% later this year as the economy continues to grapple with higher energy prices and the conflict in the Middle East. Victoria Scholar, head of investment at Interactive Investor, predicts this could force the Bank of England to raise interest rates from 3.75% to 4% by the end of the year. She said: “The Bank of England is likely to carry out roughly one 25 basis point hike by the end of the year as it looks to temper the risk of overheating and help push the inflation rate back in the direction of the central bank’s 2% target.” Meanwhile, warm and dry weather has also raised concern that food inflation could increase as supply shortages could push up prices. Economists have suggested this could push up food inflation going into 2027. While inflation remains above target levels, it’s important to make sure you’re getting a good interest rate on your savings. If your interest rate is below inflation then your money will effectively be losing value. Shop around to ensure you’re getting the best return on your nest egg. Why does inflation matter? INFLATION is a measure of the cost of living. It looks at how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time. Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate. The government sets an inflation target of 2%. If inflation is too high or it moves around a lot, the Bank of England says it is hard for businesses to set the right prices and for people to plan their spending. High inflation rates also means people are having to spend more, while savings are likely to be eroded as the cost of goods is more than the interest we’re earning. Low inflation, on the other hand, means lower prices and a greater likelihood of interest rates on savings beating the inflation rate. But if inflation is too low some people may put off spending because they expect prices to fall. And if everybody reduced their spending then companies could fail and people might lose their jobs. See our UK inflation guide and our Is low inflation good? guide for more information. Comment now