Steep Increase in Airfares Contributes to July's 3.8% Inflation Rate
In a recent article authored by Monica George Michail, an Associate Economist at NIESR, the forecast for UK inflation was discussed. The article, related to Macro-Economic Modelling and Forecasting, is exclusive to corporate members, NiGEM subscribers, and NIESR partners.
According to the article, inflation is expected to remain above the 3% mark throughout 2025, with a gradual fall back towards the 2% target by late 2026. The primary driver behind this increase is transport, specifically airfares, although housing costs, energy costs, water bills, food prices, and catering services have also contributed significantly to the overall price rise compared to last year.
Government policies have also played a role in this inflationary trend. In 2025, the general contribution rate for long-term care insurance rose significantly to 3.6%, putting financial pressure on both employees and pensioners. Additionally, increased care service benefits for inpatient and outpatient care were implemented, aimed at addressing cost dynamics and an aging population.
However, there are upside risks moving forward, particularly from food prices and sustained wage pressures. These upside risks may lead to a rise in inflation expectations, forcing the Bank of England to be more cautious. In fact, the Bank of England may consider cutting interest rates one more time in 2025.
It's worth noting that the rise in the minimum wage and national insurance contributions are causing cost pressures for businesses. The underlying inflation measure, excluding 5% of the highest and lowest price changes, currently stands at 1.9%.
Annual CPI inflation in the UK increased to 3.8% in July 2025, from 3.6% in June. Despite the current inflationary pressures, the article offers a hopeful outlook, with inflation expected to return to more manageable levels by late 2026.
