The British Pound ticked higher against the Euro and US Dollar after UK inflation rose to 3.8% in July, above expectations and up from 3.6% in June.
The increase was driven by a sharp jump in air fares and renewed strength in food and energy prices, leaving markets questioning the prospect of further Bank of England rate cuts this year.
Lloyds Bank noted that the surprise was modest, but still revealed stubborn pressures.
"Another upside surprise for UK inflation in July, with headline printing at +0.1% m/m (median 0.0%), which pushed up the y/y to 3.8% from 3.6% (survey 3.7%)."
Core and services inflation accelerated, with the latter reaching 5.0%, above consensus.
"Core prices meanwhile edged up to 3.8% y/y while services bounced to 5.0% from 4.7%, disappointing the markets 4.8% guess."
The outturn was not far from the Bank of England’s own projections, yet markets are wary given how divided policymakers already are.
"Moreover, the tight August vote split (5-4 vote with both the Chief Economist Huw Pill and Deputy Governor for Monetary Policy Clare Lombardelli opposing the cut) already tells us that many are not comfortable with the price backdrop as things stand."
Lloyds warned that price persistence in food and hospitality may yet trigger second-round effects that complicate the BoE’s path.
"The doves will look at the breakdown and try and explain it away with volatile items, but the further quickening of food inflation looks problematic and the rise in hotels and restaurant reminds of how fiscal policy (higher NI) is also filtering in."
Pantheon Macroeconomics echoed the hawkish tone, stressing that services inflation was the real concern for policymakers.
"Services CPI inflation rose to 5.0% in July, from 4.7% in June and above the consensus estimate of 4.8%, and the MPC’s forecast 4.9%."
That jump was dominated by an exceptional spike in air fares, though Pantheon still expects inflation to linger close to current levels.
"That upward move in services inflation was driven by a sharp increase in airfares prices… We continue to expect inflation to remain around 3.7% on average for the rest of 2025."
Food prices added to the pressure, with inflation reaching a 17-month high and industry surveys pointing to more to come.
"Food price inflation jumped to 4.9%, from 4.5% in June, and to a 17-month high… the BRC reported in July that food price inflation could reach 6% by December according to a survey of their members."
Energy costs also turned from a drag to a driver of inflation for the first time in almost a year.
"Electricity price inflation jumped to 8.0% year-over-year, up from 4.5% in June, while natural gas price inflation ticked up to 13.0%, from 12.3%."
Pantheon concluded that July’s data reinforced the MPC’s hawkish stance, leaving rate cuts firmly off the table this year.
"The big picture remains that inflation is set to stay miles above target for the foreseeable future; we expect headline inflation to remain above 3% until April 2026, forcing the MPC to stay on hold for the rest of this year at least."
Image Chart: UK inflation data for August 2025. Source: ONS
GBP Exchange Rates: Data Reaction
The British Pound posted broad but modest gains in currency markets following the inflation release.
Pound Sterling rose 0.1% to €1.1595 against the euro and 0.07% to $1.3495 against the dollar, while also advancing 0.11% against both the Swiss franc (CHF1.0907) and Canadian dollar (C$1.8720).
Bigger moves were seen versus the commodity currencies, with gains of 0.2% against the Australian dollar (A$2.0936) and 1.2% against the New Zealand dollar (NZ$2.3143).
Sterling also firmed against the Swedish krona (+0.19%) and Israeli shekel (+0.34%), though it slipped 0.07% against the Norwegian krone and 0.18% versus the Japanese yen.
Moves against the South African rand and Singapore dollar were marginal, up just 0.01% and 0.07% respectively.
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