July’s reading is up from a figure of 2.6% in June and stagnant readings of 2.8% in both May and April.
From a month-on-month perspective, the CPI increased by 0.3% in July versus a rise of 0.1% in July last year.
Core CPI – which excludes energy, food, alcohol and tobacco – was up by 2.6% in the year to July, marking no change from the 12 months to June.
The CPI including owner-occupiers’ housing costs (CPIH) rose by 3.1% in the year to July – an increase from 2.8% in June.
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Inflation rise was ‘always likely’
The rise has led to speculation regarding the Bank of England’s next base rate decision, with Ben Thompson, director of home moving strategy at Mortgage Advice Bureau (MAB), commenting: “After last month’s surprise fall, an inflation bounce-back was always likely. Fuel prices have been climbing again since the last reading, so today’s rise doesn’t really tell us anything we didn’t expect. What actually matters is what this does to the Bank of England’s next move, because that’s what changes the mortgage deals available.
“First-time buyers should know that lenders don’t price fixed deals against today’s rate – they price them against where they expect rates to go next. That’s why inflation data can impact what’s available before the bank does anything at all.”
David Hollingworth, associate director at L&C Mortgages, added: “This morning’s increase to the rate of inflation edges further away from the Bank of England’s 2% target. The rise in the energy price cap means that an increase this month was a certainty.
“However, the increase is largely in line with market expectations, which is important from a mortgage borrowers’ perspective. Financial markets are already factoring in the threat of interest rates having to climb to combat higher inflation.
“Anything that would cause markets to fear a more severe hike would have implications for mortgage rates. Stubborn underlying price pressures would put more pressure on the Bank of England to lift interest rates, although it’s so far taken a balanced approach.”
He continued: “Mortgage rates have risen since the outbreak of the Iran war, although a more stable period in recent weeks has helped lenders to reverse some of those increases, trimming back their fixed rates. Lenders including Nationwide, Santander and HSBC have all announced reductions to fixed rates this week, bringing a more positive tone.
“Nonetheless, there remains a volatile backdrop and it’s impossible to rule out more yo-yoing in mortgage rates at this stage. The good news is that, because today’s increase in inflation was widely anticipated, it’s less likely for there to be big repercussions in markets that would put more pressure on lenders’ funding costs in the short term.”
