Business
UK inflation: What is the rate and why are prices still rising?
BBCPrices in the UK rose by 3.8% in the 12 months to July, driven by higher air fares, as well as increases in the cost of food.
It means inflation remains above the Bank of England’s 2% target.
The Bank moves interest rates up and down to try to keep inflation at that level, and has cut interest rates five times since August 2024.
What is inflation?
Inflation is the increase in the price of something over time.
For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%.
How is the UK’s inflation rate measured?
The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).
This virtual “basket of goods” is regularly updated to reflect shopping trends, with virtual reality headsets and yoga mats added in 2025, and local newspaper adverts removed.
The ONS monitors price changes over the previous 12 months to calculate inflation.
The main inflation measure is called the Consumer Prices Index (CPI), and the latest figure is published every month.
CPI was 3.8% in the year to July 2025, up from 3.6% in the 12 months to June. The July 2025 figure is the highest recorded since January 2024, when the rate was 4.0%.
The Bank also considers other measures such as “core inflation” when deciding whether and how to change rates.
This doesn’t include food or energy prices because they tend to be very volatile, so can be a better indication of longer term trends.
Core CPI was 3.8% in the 12 months to July, up slightly from 3.7% recorded in the year to June.
Why are prices still rising?
Inflation has fallen significantly since hitting 11.1% in October 2022, which was the highest rate for 40 years.
But that doesn’t mean prices are falling – just that they are rising less quickly.
Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.
It then remained well above the 2% target partly because of higher food prices.
These continue to be a significant factor in the current inflation figures.
Inflation for food and non-alcoholic beverages was 4.9% in the year to July, up from 4.5% in the year to June.
Beef, sugar, chocolate, instant coffee and fruit juice saw significant price rises.
But the main factor driving the July inflation figure was higher air fares, which saw the largest July increase since the ONS began collecting that data on a monthly basis in 2001.
In addition, fuel prices fell only slightly between May and June 2025, compared to a larger drop in the same period in 2024.
Why does putting up interest rates help to lower inflation?
When inflation was well above its 2% target, the Bank of England increased interest rates to 5.25%, a 16-year high.
The idea is that if you make borrowing more expensive, people have less money to spend. People may also be encouraged to save more.
In turn, this reduces demand for goods and slows price rises.
But it is a balancing act – increasing borrowing costs risks harming the economy.
For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.
Businesses also borrow less, making them less likely to create jobs. Some may cut staff and reduce investment.
In recent months inflation has remained above the Bank’s target at the same time as the economy has remained relatively flat and the jobs market has softened.
Therefore, the Bank has chosen to cut rates, despite high inflation, in an attempt to encourage people to spend more and get businesses to invest and create jobs to boost the economy.
What is happening to UK interest rates and when will they go down again?
The Bank of England began cutting rates in August 2024, and made five cuts to bring the rate down to 4%.
Bank of England governor Andrew Bailey had said that future cuts will be made gradually and carefully.
The August interest rate decision was extremely close, with the committee voting 5-4 to cut rates by a quarter percentage point.
It followed an unprecedented second vote by the Bank’s policymakers, as one economist wanted a larger cut of half a percentage point.
This suggests future interest rate decisions could also be finely balanced.
Inflation is now expected to peak at 4% in September, the Bank said in its latest Monetary Policy Report. That is twice the Bank’s target rate and above the 3.8% high it predicted in its previous report in May.
A further interest rate cut had been expected at the Bank’s meeting in November, but analysts are now less sure this will happen given the closeness of the August vote.
The Bank also has to consider the wider global economy. Mr Bailey has repeatedly warned about the unpredictable impact of US tariffs, and conflict in Israel and Iran has also created uncertainty.
Are wages keeping up with inflation?
Annual average regular earnings growth was 5.7% for the public sector and 4.8% for the private sector.
Meanwhile, separate ONS figures showed the number of vacancies fell again to 718,000 for the May to July period, marking three continuous years of falling job openings.
The unemployment rate was 4.7% in the three months to July – the same as the three months to April.
This marked the highest level of unemployment since June 2021, and is also likely to factor into the Bank of England’s decision whether to cut rates again.
What is happening to inflation and interest rates in Europe and the US?
The US and EU countries have also been trying to limit price increases.
The inflation rate for countries using the euro was 2.1% in August, according to an early estimate.
In June 2024, the European Central Bank (ECB) cut its main interest rate from an all-time high of 4% to 3.75%, the first fall in five years.
By July 2025, after several further cuts, its key rate stood at 2%.
Inflation in the US held steady at 2.7% in July, remaining above the US central bank’s 2% target.
After a string of cuts in the latter part of 2024, the US central bank again chose not to change rates at its July 2025 meeting, the fifth hold in a row.
That leaves its key interest rate unchanged in a range of 4.25% to 4.5%.
The Federal Reserve has repeatedly come under attack from President Trump, who wants to see further interest rate cuts.
Business
EU-India On Verge Of Historic Trade Pact: Why The Pact Is Called ‘Mother Of All Deals’, How It Will Transform Global Economy
EU-India Trade Deal: European Commission President Ursula von der Leyen said negotiators had made substantial progress, with only final steps remaining before both sides can seal what she described as a potentially historic agreement.
The European Union (EU) and India are moving closer to finalising a free trade agreement, which could rank among the largest economic pacts ever attempted, hinted European Commission President Ursula von der Leyen at the World Economic Forum in Davos on Tuesday.
Her statements pointed to a deal, which has been years in the making and now appears to be approaching a decisive phase. “There is still work to do. But we are on the cusp of a historic trade agreement. Some call it the mother of all deals, one that would create a market of 2 billion people, accounting for almost a quarter of global GDP,” she said, as describing the EU’s push to diversify trade ties and reduce strategic vulnerabilities.
Why This Agreement Carries Global Weight
The proposed pact carries a scale that few trade agreements can match. A formal economic bridge between one of the world’s fastest-growing major economies and a bloc that is central to global commerce would change supply chains at a moment when countries are re-evaluating how and where they trade.
For Brussels, India has emerged as a key partner in its effort to reduce dependence on China and broaden engagement with economies seen as reliable and long term. For New Delhi, access to the EU’s 27-member market, its second-largest trading partner, would support export growth and strengthen India’s push to climb higher in global manufacturing and services.
Talks Back In Fast Lane
Discussions on an India-EU free trade agreement began in 2007 and then lost momentum for almost a decade. The discussions were revived in 2022, backed by fresh political commitment on both sides. Since then, negotiations have advanced along with the India-EU Trade and Technology Council, a forum established to align cooperation on critical technologies, digital rules and supply-chain resilience.
This parallel engagement has helped narrow regulatory differences and expanded the scope of talks beyond tariffs, giving negotiators room to address newer economic realities.
Why The Deal Is Moving Fast
Geopolitical developments are adding urgency. The EU is moving to diversify away from concentrated dependencies, and India is positioning itself as a central player in redesigned global supply networks.
Trade numbers highlight the momentum. Goods trade reached 124 billion euro in 2023, and services trade, led largely by digital and IT services, is estimated at 60 billion euro. Officials on both sides believe a comprehensive agreement could unlock far greater potential, especially in clean energy, pharmaceuticals, advanced manufacturing and digital services.
Issues Still On The Table
Optimism from Davos has not erased the remaining challenges. European negotiators continue to seek tariff reductions on automobiles, wines and spirits, sectors India has traditionally protected to shield domestic industries.
India is pressing for improved conditions for the movement of skilled professionals, an issue that is sensitive within the EU because visa and mobility policies differ across member states.
Sustainability standards, access to public procurement and regulatory alignment are also under discussion. These issues are politically sensitive; and therefore, von der Leyen stressed that “there is still work to do”.
Her visit to India early next week is expected to be crucial. Diplomats view the trip as a chance to settle the most difficult questions at the political level and provide clear direction to negotiators. The timing is important, coming ahead of a planned India-EU leaders’ meeting later this month, where both sides aim to show tangible progress and possibly point to a breakthrough.
Why The Deal Matters
A final agreement would stand among the EU’s most consequential trade achievements in recent years and strengthen India’s integration into global supply chains.
It would strengthen flows of goods, services and investment, offer more predictable market access, expand cooperation on technology and standards and send a strong signal of strategic alignment at a time when global trade is being changed.
A combined market representing nearly a quarter of global GDP would immediately place the EU-India pact among the most influential trade agreements in the world, with ripple effects far beyond Europe and South Asia.
Jonathan Josephs,Business reporterand
Nick Edser,Business reporter
Bloomberg via Getty ImagesThe European Parliament is planning to suspend approval of the US tariffs deal agreed in July, according to sources close to its international trade committee.
The suspension is set to be announced in Strasbourg, France on Wednesday.
The move would mark another escalation in tensions between the US and Europe, as Donald Trump ratchets up his efforts to acquire Greenland, threatening new tariffs over the issue on the weekend.
The stand-off has rattled financial markets, reviving talk of a trade war and the possibility of retaliation against the US for its trade measures.
Shares on both sides of the Atlantic were lower on Tuesday, with European stock markets seeing a second day of losses. In the US, the Dow Jones was down 1.3% in midday trading, while the S&P 500 dropped 1.5% and the Nasdaq was 1.7% lower.
On the currency markets, the US dollar also fell sharply. The euro climbed 0.7% against the dollar to $1.1731 while the pound rose by 0.2% to $1.346.
Borrowing costs also rippled higher around the world, as the biggest sell-off of long-term government debt in months drove up yields on 30-year bonds in markets including the US, UK and Germany.
Trade tensions between the US and Europe had eased since the two sides struck a deal at Trump’s Turnberry golf course in Scotland in July.
That agreement set US levies on European goods at 15%, down from the 30% Trump had initially threatened as part of his “Liberation Day” wave of tariffs in April. In exchange, Europe had agreed to invest in the US and make changes at on the continent expected to boost US exports.
The deal still needs approval from the European Parliament to become official.
But on Saturday, within hours of Trump’s threat of US tariffs over Greenland, Manfred Weber, an influential German member of European Parliament, said “approval is not possible at this stage”.
The EU had put on hold plans to retaliate against the US tariffs with its own package targeting €93bn ($109bn, £81bn) worth of American goods while the two sides finalised the details.
But that reprieve ends on 6 February, meaning EU levies will come into force on 7 February unless the bloc moves for an extension or approves the new deal.
French Prime Minister Emmanuel Macron was among those urging the EU to consider its retaliatory options, including the anti-coercion instrument, nicknamed a “trade bazooka”.
Washington’s “endless accumulation” of new tariffs is “fundamentally unacceptable, even more so when they are used as leverage against territorial sovereignty,” he said in a speech at the World Economic Forum in Davos.
American response
Also speaking in Davos, US Treasury Secretary Scott Bessent reiterated his warning to European leaders against retaliation, urging them to “have an open mind”.
“I tell everyone, sit back. Take a deep breath. Do not retaliate. The president will be here tomorrow, and he will get his message across,” he said.
Commerce Secretary Howard Lutnick and US Trade Representative Jamieson Greer warned that the US would not let retaliation go without response.
“What I’ve found is that when countries follow my advice, they tend to do okay. When they don’t, crazy things happen,” Greer said, in remarks reported by the Agence France-Presse.
The US has previously expressed impatience with European progress toward approval of the deal amid ongoing disagreements over tech and metals tariffs.
The US and the 27-nation European Union are each others’ single biggest trade partners, with more than €1.6tn ($1.9tn, £1.4tn) in goods and services exchanged in 2024, according to European figures. That represents nearly a third of all global trade.
When Trump started announcing tariffs last year, it prompted threats of retaliation from many political leaders, including in Europe.
In the end, however, many, opted to negotiate instead.
Only China and Canada stuck by their threats to hit American goods with tariffs, with Canada quietly withdrawing most of those measures in September, concerned they were damaging the Canadian economy.
In a speech in Davos on Tuesday, Canadian Prime Minister Mark Carney urged “middle powers” to unite to push back against the might-makes-right world of great power rivalry that he warned was emerging.
“When we only negotiate bilaterally with a hegemon, we negotiate from weakness. We accept what is offered. We compete with each other to be the most accommodating,” he warned. “This is not sovereignty. It is the performance of sovereignty while accepting subordination.”
Looming in the background of the trade tensions is a pending Supreme Court decision over whether many of the tariffs Trump announced last year are legal.
Stocks fell sharply while the bond market creaked amid ongoing tension and increased rhetoric over the future of Greenland.
The FTSE 100 index closed down 68.57 points, 0.7%, at 10,126.78 on Tuesday.
The FTSE 250 ended 153.94 points lower, 0.7%, at 22,957.87, and the AIM All-Share closed down 2.35 points, 0.3%, at 801.14.
The threat of tariffs from US President Donald Trump continued to weigh heavy on European markets, while screens on Wall Street were a sea of red as trading resumed following Monday’s public holiday.
In European equities on Tuesday, the CAC 40 in Paris closed down 0.6%, while the DAX 40 in Frankfurt ended 1.0% lower.
In New York, financial markets were lower at the time of the London equity market close.
The Dow Jones Industrial Average was down 1.3%, the S&P 500 was 1.4% lower and the Nasdaq Composite faltered 1.5%.
Mr Trump said at the weekend that, from February 1, Britain, Denmark, Finland, France, Germany, the Netherlands, Norway and Sweden would be subject to a 10% tariff on all goods sent to the US until Denmark agrees to cede Greenland.
The announcement drew angry charges from US allies who are pondering countermeasures.
“Trade concerns are now front and centre, with European leaders pushing back against Washington’s stance and reportedly discussing countermeasures,” said David Morrison, senior market analyst, at Trade Nation.
“The potential use of the EU’s Anti-Coercion Instrument has added to market unease, particularly for export-heavy sectors such as autos and luxury goods, which have already come under pressure.”
Mr Morrison pointed to apparent split over how Europe should respond to Mr Trump’s threats.
“While UK Prime Minister Starmer pursues a softly-softly approach, insisting that jaw-jaw is better than war-war, French President (Emmanuel) Macron favours a more aggressive approach and wants to fight US tariffs with European ones,” he said.
European Commission president Ursula von der Leyen cautioned that Mr Trump risked plunging US ties with the EU into a “downward spiral”.
While Mr Macron warned against US attempts to “subordinate Europe”, and blasted as “unacceptable” Mr Trump’s threats to impose tariffs of up to 25% on countries opposed to his Greenland plans.
Reports suggested Europe could consider retaliatory tariffs and also possibly a concerted strategy to offload US treasury bonds.
The yield on the US 10-year treasury was quoted at 4.28%, widening from 4.21% on Friday.
The yield on the US 30-year treasury was quoted at 4.91%, stretched from 4.82% on Friday.
The focus now switches to Davos, which Mr Trump is due to address on Wednesday.
“Escalation or softening in tone seems likely to set the direction for European risk assets in the days ahead,” said Mr Morrison.
Adding to the bond market angst was a sharp sell-off in Japan.
Kathleen Brooks at XTB Research said while the sell off in long end bond yields was global, the biggest move “by far” was in Japan.
The 30-year Japanese bond yield rose 26 basis points, as investors “fret about an expansionary fiscal policy if PM (Sanae) Takaichi wins the February 8 election,” she pointed out.
“The Greenland issue is taking the headlines today, however, in the long term, the insane rise in Japanese bond yields could have a bigger global effect,” Ms Brooks suggested.
“Japan is central to global capital flows, if there is disruption in Japanese financial markets then this could have a knock-on effect on global capital flows and overall risk sentiment,” she added.
Ms Brooks said the risk is that the sell off in bonds causes “something to break, either a Japanese bank or fund gets into trouble like Silicon Valley Bank back in 2023, which is why it is worth watching the Japanese bond market as well as the Trump show this week.”
The pound was quoted higher at 1.3462 dollars at the time of the London equities close on Tuesday, compared to1.3428 dollars on Monday.
The euro stood at 1.1733 dollars, higher against 1.1643 dollars.
Against the yen, the dollar was trading at 157.95 yen, lower from 158.11 yen.
In London, analysts weighed data which pointed to a cooling labour market and a slowing in average wage growth.
According to the Office for National Statistics, the jobless rate was 5.1% in the three months to November, unchanged from the three months to October.
This came slightly above the FXStreet-cited market consensus, which had pencilled in a slight fall in unemployment to 5.0%.
The ONS said pay-rolled employees in the UK fell by 155,000, or 0.5%, on-year in November, and fell by 33,000, or 0.1%, on-month.
Annual growth in regular earnings, excluding bonuses, was 4.5% in the three months to November, slowing from 4.6% in the three months to October.
Annual average regular earnings growth was 7.9% for the public sector and 3.6% for the private sector.
“Today’s labour market data showed easing wage pressures, weak employment and rising redundancies. We judge this to be consistent with our view that the labour market continues to ease and has further to go in coming months,” said analysts at Barclays.
Informa led the blue chip risers, up 4.6%, after reporting “strong trading” in the fourth quarter.
The London-based events, digital services, and academic publishing business expects revenue of at least £4.0 billion in 2025, up 13% from £3.55 billion in 2024, representing underlying revenue growth of 6.3%.
On the FTSE 250, the weak labour statistics weighed on PageGroup, down 3.8%, and Hays, down 0.3%.
Morgan Stanley reiterated an ‘underweight’ stance on both recruitment firms and cut share price targets.
Elsewhere, Funding Circle jumped 14% as it reported stronger-than-expected revenue and profit growth in 2025, achieving its financial 2026 revenue target a year earlier.
The London-based lending platform focused on small and medium enterprises said revenue for the year was about £204 million, up 28% from a year earlier, beating market expectations of £191 million.
Profit before tax rose to around £20 million from £3 million in 2024, also ahead of consensus of £17 million.
Wise Group jumped 15% as analysts raised profit forecasts amid strong third quarter trading.
The London-based money transfer services provider expects full-year underlying income to be around the middle of its guided range of 15% and 20% growth, and expects underlying pre-tax profit margin for financial 2026 to be “towards the top” of the guided 13% to 16% target range.
JPMorgan analyst Craig McDowell said the underlying income forecast was better than consensus at 16.3%, while the underlying pre-tax profit margin projection was ahead of consensus at 14.3%.
McDowell predicted 9% to 12% pretax profit upgrades for financial 2026, while Bank of America was more bullish, raising numbers by 20%.
Brent oil traded higher at 64.89 dollars a barrel on Tuesday, down from 64.13 dollars late on Monday.
Gold was quoted at 4,742.56 dollars an ounce on Tuesday, up from 4,671.76 dollars on Monday.
The biggest risers on the FTSE 100 were Informa, up 39.8 pence at 912.2p, Haleon, up 11.8p at 372.9p, Endeavour Mining, up 112.0p at 4,208.0p, Rentokil Initial, up 8.0p at 461.7p and Melrose Industries, up 9.0p at 625.8p.
The biggest fallers on the FTSE 100 were Mondi, down 41.2p at 845.4p, Beazley, down 44.0p at 1,126.0p, Pershing Square Holdings, down 134.0p at 4,442.0p, Land Securities, down 19.0p at 635.0p and Bunzl, down 57.0p at 1,989.0p.
Wednesday’s global economic calendar has UK inflation figures and Canadian producer price inflation data.
Wednesday’s UK corporate calendar has trading statements from luxury goods manufacturer Burberry, sports retailer JD Sports, electrical retailer Currys and pub chain JD Wetherspoon.
– Contributed by Alliance News
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