The UK's cost of living crisis is back with a vengeance, and it's all about to get worse. Soaring energy bills are forecast to lift inflation, and the situation is dire. As the Iran war continues to send shock waves through global energy markets, the UK is facing a renewed squeeze on household budgets. Economists predict that the surge in gas and electricity bills will push Britain's headline inflation rate to 2.9%, a significant jump from June's 2.6%. This is a major concern for the Bank of England, which is considering raising interest rates as early as September to combat stubbornly high inflation. The latest figures from the Office for National Statistics (ONS) are expected to show a jump in inflation, highlighting the challenge for Andy Burnham's government to ease financial pressure on households and businesses before a difficult autumn budget. The Ofgem energy price cap increase of 13% in July is a major contributor to this crisis. Thomas Pugh, chief economist at RSM UK, predicts that this increase will add about 0.44 percentage points to headline inflation, which will be partially offset by falling petrol and diesel prices. This is a stark reminder of the cost of living squeeze that is set to return to the headlines. The Middle East war is fueling volatility in global oil prices, and countries worldwide are facing renewed inflationary pressures. Britain's economy has shown resilience, with official figures showing it continued to grow in the first half of 2026 at the fastest pace in the G7. However, the impact of the conflict is likely to weigh more heavily in the second half of the year after the Ofgem energy price cap increase. The Bank of England predicts UK inflation will reach 3.2% before the end of the year, despite government measures to limit the impact. Andy Burnham's government has announced a raft of 'breathing space' measures, including cutting VAT to reduce consumer electricity bills by an average of £45 a year from October. The Bank expects these policies to lower the headline inflation rate by 0.1 percentage points. However, the Bank of England kept borrowing costs unchanged last month, warning 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 coming at its next policy meeting in September. Victoria Scholar, head of investment at Interactive Investor, warns that inflation is expected to continue rising, peaking above 3% later this year, as the UK economy grapples with elevated energy prices and the gridlock in the Strait of Hormuz. This situation is a cause for concern, and it highlights the need for further action to ease the cost of living crisis. The UK must act quickly to mitigate the impact of soaring energy bills and rising inflation. The government's measures are a good start, but more is needed to ensure that households and businesses can weather the storm.
