I am glad that I looked at things in an optimistic light yesterday because the news from the UK this morning heads towards the other end of the spectrum.
The Consumer Prices Index (CPI) rose by 3.8% in the 12 months to July 2025, up from 3.6% in the 12 months to June.
So we are in another inflationary episode and for example as I pointed out last Tuesday with wage growth slowing it looks as though the period of real wage growth is ending. If we look internationally to our peers we see this.
Euro area annual inflation is expected to be 2.0% in July 2025, stable compared to June 2025. ( Eurostat)
The US has different methodology for its CPI ( mostly more imputed rents or what it calls shelter) but has an inflation rate of 2.7% using it. So the UK is an outlier and sadly much of the cause is official. For example we saw this earlier this month from the Bank of England.
At its meeting ending on 6 August 2025, the MPC voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 4%, rather than maintaining it at 4.25%.
Governor Andrew Bailey forced this through with the claimed justification below.
There has been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy. That progress has allowed for reductions in Bank Rate over the past year.
I regularly point out how central bankers distort and abuse language and this is another case because UK has been on a rising path since the 1.7% of September 2024 and yet they try to claim that this is “substantial disinflation”. Up is again the new down.
Also the Chancellor of the Exchequer has played a role in raising inflation both via the pay rises she gave the public-sector as one of her first moves. Plus the rise in employer’s National Insurance contributions which raised labour costs. The expected impact of the changes is below.
The combined effects of the measures included in the Budget are provisionally expected to boost CPI inflation by just under ½ of a percentage point at their peak relative to the projection in the August Report.
Remember the Bank of England is likely to understate the impact and I have highlighted below an example of that.
The increase in employer NICs is also assumed to have a small upward impact on inflation.
Returning to the Bank of England back in that November 2024 Monetary Policy Report they told us this.
In the forecast, conditioned on the market path for interest rates, CPI inflation is expected to rise to around 2¾% by the second half of 2025 before falling back to around the 2% target in the medium term.
So yet another forecasting failure as we now now the peak is around 1% higher than that and as we stand there is no sign of falling back. In fact compared to last year July is more inflationary.
On a monthly basis, CPI rose by 0.1% in July 2025, compared with a fall of 0.2% in July 2024.
But there is something worse because look what they did back then.
Easing inflationary pressures meant we were able to cut interest rates to 5% in August.
We are cutting interest rates again today, to 4.75%.
So we have seen a sequence of cuts to interest-rates of 1% if we start counting from November and we have seen inflation be 1% higher than the forecast. That is a failure and a pretty complete one.
Also remember all the rhetoric about the Bernanke Review and how it was supposedly going to improve the economic forecasting?
And you’re still the sameI caught up with you yesterday (still the same, still the same)Moving game to gameNo one standing in your way. ( Bob Seeger)
The only real change was the boost to Ben Bernanke’s pension pot.
What happened in July?
Whilst we are looking at official failures I have been warning about problems with the measurement of airfares for some time now.
Transport, particularly air fares, made the largest upward contribution to the monthly change in both CPIH and CPI annual rates;
It was only yesterday that the release of the Retail Sales number for July was postponed until September 5th leaving everyone wondering what has gone wrong there? Today’s inflation release has another issue.
We have identified a minor error in the imputation of missing seasonal item indices. This error has no impact on headline CPI or CPIH annual and monthly growth rates. The Retail Prices Index (RPI) is also unaffected.
I am sorry to have to say that their track record on telling the truth means that fears that there is a larger issue here will not be fixed by the denial.
Also they are presently unable to produce producer price numbers and yesterdays Blue Book GDP release hinted at yet another delay before they are fully back.
Some further changes are anticipated to PPIs and SPPIs in the 2026 Annual National Accounts. During investigations, it was determined that the price-updating of index weights also needed to be improved. This second improvement was not available in time for inclusion into the 2025 Annual National Accounts.
The word “improved” as used by the UK Office for National Statistics is another one which has an awful track record.
Food Inflation
As you can see there is an ongoing issue here.
On a monthly basis, food and non-alcoholic beverages prices rose by 0.4% in July 2025, compared with being little changed a year ago.
The leader of the pack here was something we have been expecting after the rise in cocoa prices.
Sugar, jam, syrups, chocolate and confectionery…….with the main contributions coming from chocolate assortments.
Meat and the category for milk,cheese and eggs both rose by 0.6% on the month. On the other side of the coin fish prices fell by 1.8%.
This is interesting from Javier Blas.
CHART OF THE DAY: The UK beef price shock. UK beef and veal inflation is running at nearly 25% year-on-year, contributing to higher food inflation. (really bad for inflation expectations as the supermarket trolley has an outsize impact on people’s price perception) #beef
His chart is below.
Transport
In addition to airfares there was this.
The average price of petrol rose by 2.0 pence per litre between June and July 2025, compared with a fall of 1.4 pence per litre between June and July 2024……..Similarly, diesel prices rose by 2.9 pence per litre in July 2025, compared with a fall of 1.1 pence per litre in July 2024.
Returning to airfares here are the numbers and the excuse.
The rise in the annual rate reflected a large upward effect from airfares which rose by 30.2% between June and July 2025, compared with a rise of 13.3% between the same months in 2024. The monthly rise in July 2025 is the largest July increase since collection of airfares changed from quarterly to monthly in 2001 and was probably influenced by the timing of school summer holidays.
I have pointed our before that the issue with airfare measurement seems to be particularly around Europe.
Returning European flights were during the school term in 2024, whereas returning European flights were during the school holidays in 2025, which may have made these flights more expensive.
Let me take you back to the 18th of October 2023 when another aspect of the measurement of airfare inflation troubled me.
You see the weight for this area has doubled so a slightly smaller fall this year leads to a larger monthly fall. I realise this is very technical but the pandemic period has highlighted what a big issue this can be.
The list of problems for this category is now pretty comprehensive.
Restaurants and Hotels
This was another area of rises.
On a monthly basis, prices rose by 0.4% in July 2025, compared with a fall of 0.4% a year ago.
The largest upward effect came from accommodation services, specifically from overnight hotel stays booked the night before. There were smaller upward effects from restaurants and cafes, and from canteens.
Fallers
It was clothing and footwear (-1.9%) and furniture (-1.6%) or if you prefer the summer sales.
Comment
One way of looking at all of this is UK institutional failure. We have a Bank of England getting its forecasts wrong and more importantly cutting interest-rates based on the wrong forecasts. We have a Chancellor of the Exchequer Rachel Reeves who has raised inflation with her policies. Then we have an Office for National Statistics which has problems with pretty much every economic measure it has.
Remember these are the same institutions that have rubbished our cost of living measure.
The all items RPI annual rate is 4.8%, up from 4.4% last month.
I remain of the view that it is our best measure. No inflation measure is perfect but if you look at its track record in recent years it has been a better measure than the officially supported ones. It’s biggest problem is simply that it produces a higher number.
