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 close to 3%.As the Iran war continues to send shock waves through 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%.In a fresh squeeze on household budgets, the figures from the Office for National Statistics (ONS) due on Wednesday are forecast to show a jump from a rate of 2.6% in June.It comes as the England" class="entity-link entity-organization" data-entity-id="2477" data-entity-type="organization">Bank of England considers raising interest rates from as early as September in response to fears over stubbornly high inflation becoming entrenched in the economy.The latest snapshot will also highlight the challenge facing Andy Burnham’s government to ease the financial pressure on households and businesses before a difficult autumn budget.Economists said a rise in inflation as measured by the consumer prices index was likely after Ofgem, the energy regulator, lifted its cap on household gas and electricity bills by 13% in July.Thomas Pugh, chief economist at the accountancy firm RSM UK, said the increase would add about 0.44 percentage points to headline inflation. This would be partly offset by a fall in petrol and diesel prices.“The cost of living squeeze is set to return to the headlines,” he said. “[Higher inflation is] adding fresh pressure to household budgets and complicating the outlook for interest rates.”As the stop-start Middle East war fuels volatility in the global oil price, countries around the world are facing renewed inflationary pressures and heightened uncertainty over the scale of the economic hit.Britain’s economy has shown more resilience than initially feared, with official figures last week showing that it continued to grow in the first half of 2026 at the fastest pace in the G7. inflation also fell by more than expected in June, to 2.6% – down from a peak of 3.8% last year.It is hoped the fall in petrol and diesel prices could partly offset the rise in energy bills. Photograph: Andy Rain/EPAInflation had been on track to fall to close to 2% before the outbreak of the Iran war.However, economists warn the impact from the conflict is likely to weigh more heavily in the second half of the year after the increase in the Ofgem energy price cap.Separate figures on the UK jobs market due to be released on Tuesday are also expected to show a continued slowdown in wage growth.skip past newsletter promotionafter newsletter promotionWith households under pressure from the renewed rise in energy costs, the England" class="entity-link entity-organization" data-entity-id="2477" data-entity-type="organization">Bank of England predicts UK inflation will reach 3.2% before the end of the year, despite government measures to limit the impact.Burnham used his first week as prime minister to announce a raft of “breathing space” measures to ease the cost of living, including cutting VAT to reduce consumer electricity bills by an average of £45 a year from October.The Bank said it expected the policy, alongside a £2 cap on bus fares in England, to lower the headline inflation rate by 0.1 percentage point.However, Threadneedle Street kept borrowing costs unchanged last month as it warned that a worst-case scenario – involving further escalation in the Middle East war – could drive inflation to a peak of 4.5% by the middle of 2027.City investors anticipate two quarter-point interest rate rises from the Bank before the end of next year, with financial markets giving an almost one-in-four chance of the first increase in the base rate, now 3.75%, coming at its next policy meeting in September.Victoria Scholar, head of investment at the financial platform Interactive Investor, said: “inflation is expected to continue to rise, peaking above 3% later this year, as the UK economy continues to grapple with the backdrop of elevated energy prices and the effective gridlock in the strait of Hormuz.“The Bank is likely to carry out roughly one 25 basis point hike by the end of the year as it looks to temper the risk of overheating and help push the inflation rate back in the direction of [its] 2% target.”