New UK cost of living crisis looms with soaring energy bills forecast to lift inflation

British households are facing a renewed cost of living squeeze, with official figures expected to show this week that soaring energy bills drove up inflation in July to nearly 3%. As the Iran war continues to disrupt global energy markets, economists predict the surge in UK gas and electricity bills last month will push Britain’s headline inflation rate to 2.9%. This follows a June rate of 2.6%, with the Bank of England considering raising interest rates from as early as September to combat persistent inflation. The latest inflation data, due from the Office for National Statistics (ONS) on Wednesday, will also highlight the challenge for Andy Burnham’s government to ease financial pressure on households and businesses before the autumn budget. Economists say a rise in inflation, as measured by the consumer prices index, is likely after Ofgem lifted its cap on household gas and electricity bills by 13% in July. Thomas Pugh, chief economist at RSM UK, estimates this increase will add about 0.44 percentage points to headline inflation, partly offset by a fall in petrol and diesel prices. The cost of living squeeze is set to return to headlines, with higher inflation adding fresh pressure to household budgets and complicating interest rate outlook. Meanwhile, the Middle East war fuels volatility in global oil prices, causing renewed inflationary pressures worldwide. Britain’s economy has shown more resilience than feared, with growth in the first half of 2026 the fastest in the G7, though inflation fell to 2.6% in June from a peak of 3.8% last year. Inflation was expected to fall to near 2% before the Iran war outbreak, but economists warn its impact will weigh more heavily in the second half of 2026 after the Ofgem price cap increase. Separate UK jobs market figures due Tuesday may show a continued slowdown in wage growth. The Bank of England predicts UK inflation will reach 3.2% by year-end despite government measures like cutting VAT to reduce electricity bills by £45 annually from October and a £2 cap on bus fares in England. However, Threadneedle Street warned a worst-case scenario—further Middle East escalation—could push inflation to 4.5% by mid-2027. City investors anticipate two quarter-point interest rate hikes by year-end, with markets giving a 25% chance of the first rate hike in September. Victoria Scholar, head of investment at Interactive Investor, said: ‘Inflation is expected to continue rising, peaking above 3% later this year, as the UK economy grapples with elevated energy prices and Hormuz Strait gridlock. The Bank is likely to conduct roughly one 25 basis point hike by year-end to temper overheating risks and help inflation return to its 2% target.’