Prices in shops descend at the steepest pace in over three years
In the UK, the cost-of-living crisis continues to impact households, with food and energy inflation remaining a significant concern. According to recent data, food inflation has risen, with a 12-month inflation rate for food and non-alcoholic beverages increasing to 4.9% in July 2025, up from 4.5% in June 2025. This marks the fourth consecutive monthly increase.
Energy prices have also contributed to the inflation rise. Administered energy prices have increased, while motor fuel prices have experienced deflation for 12 consecutive months as of July 2025. This means that energy costs are likely to keep inflation elevated near term, causing increased utility costs that continue to strain household budgets.
Despite recent monetary easing, the Bank of England held interest rates at 5% last month. However, mortgage repayment pressure is easing, albeit still significant. The average two-year fixed-rate mortgage now costs 5.40%, and the average five-year deal costs 5.07%. These rates have fallen from their highs last year, but remain elevated compared to where they were in the late 2010s.
The overall economy is showing subdued but stable growth, with around 1.25% projected before improving later. The labor market shows gradual loosening, and some spare capacity has emerged. Disinflationary pressures are expected to continue, though upside inflation risks have slightly increased in the medium term.
Services inflation, an important measure for the Bank of England, is a key factor to watch. The services sector accounts for around 80% of the UK's economic output. The Consumer Prices Index (CPI) has inched up to 2.2% since hitting the Bank of England's 2% target in May.
The impact on household budgets includes persistent financial pressure due to rising food and energy costs, stagnant wage growth relative to inflation, and increased borrowing costs over the prior period. Consumer intentions to reduce spending remain high, with around 88% of households planning cutbacks into the current financial year.
In summary, despite recent monetary easing, UK households continue to face significant budget pressures driven by elevated food and energy inflation amid a still-challenging economic environment. The government could unleash further pain for households later this month with its Budget, as Chancellor Rachel Reeves is expected to unveil a series of tax rises to help plug a £22bn shortfall in the public finances.
- The increased cost of food and energy, along with stagnant wage growth and high borrowing costs, has resulted in ongoing financial strain for UK households, which is of great interest to the finance sector as it pertains to business.
- The Bank of England's decision to maintain interest rates at 5%, while mortgage rates have fallen slightly from last year's highs, indicates a continued financial challenge for UK households in the property market, even as the overall economy shows steady growth.
