When the Bank of England hits its 2% target, why does no one celebrate? The real question is whether hitting a target matters when everyone can see the fire is still burning.
That will be the central tension when the UK releases July's inflation figures. According to analysis from TD Securities by Julie Ioffe, the headline CPI is expected to jump to 2.9% year-on-year, a predictable surge from June's 2.6% as reported by FXStreet. The culprit isn't a new policy failure, but a mechanical one: the Ofgem energy price cap adjustment. This is the ‘known unknown.’ Everyone saw it coming, but its arrival exposes the Bank of England's problem: technical hits to its target mask a stubborn underbelly of price pressure that refuses to die quietly.
Was That the Bottom? Ofgem Exposes the Headline's Fragility
It's tempting to dismiss July's rise as a statistical glitch. But the real story is that even with this artificial bump, the underlying trend might be getting worse.
The Ofgem price cap adjustment acts like a timer, forcing a previously disinflationary factor, falling energy prices, to abruptly reverse at a set date. Markets and the Bank of England (BoE) knew it was coming; TD Securities' forecast aligns precisely with the market consensus of 2.9%. The public, however, sees a clear narrative: inflation is moving in the wrong direction again.
"We expect headline inflation to move up to 2.9% y/y in July... explained largely by the Ofgem price cap adjustment in the energy component."
The danger isn't the July print itself. It’s the risk that this headline surge, broadcast without nuance, destabilizes the carefully managed inflation expectations the BoE has worked for two years to anchor. It turns a mechanical policy into a public relations menace.
What Lies Beneath the Energy Spike?
Underneath the headline surge, the component data tells a more troubling story of persistence. TD Securities breaks it down: services inflation is forecast to ease only to 3.4%, down from 3.6%. That's a move in the right direction, but from a level still far too high. It shows the powerful, sticky pressures from wages and domestic demand are retreating at a glacial pace.
Simultaneously, core goods inflation is expected to pick up to 1.0%. This is a critical pivot point. The long-awaited period of durable goods deflation is hitting its end. Discounted TVs and clothes can't offset service costs forever. As TD notes, "electronics price increases and renewed supply chain pressures [are] reducing the scope for discounting."
The net result? These two forces largely offset each other, leaving core CPI, the BoE's preferred measure of underlying inflation, stubbornly parked at 2.6%, matching the bank's own forecast. The 'core' of the problem isn't moving.
Quick breakdown of projected components:
- Headline CPI: +2.9% YoY
- Services Inflation: 3.4% YoY
- Core Goods Inflation: 1.0% YoY
- Core CPI: 2.6% YoY
Why This Is More Than Just a Gas Bill Shock
The fresh trouble for the Bank of England is that this isn't a one-month energy story; it's the warning flare for several new inflation fronts.
TD Securities points to three specific and gathering headwinds that could challenge the disinflation trend in the months ahead:
"Food prices are vulnerable to a pickup as fertiliser costs and adverse weather conditions feed through to production costs. Airfare inflation could also re-accelerate with airlines already suggesting that they will seek to recover higher fuel expenses... Meanwhile, core goods inflation is showing signs of turning higher."
Food, airfares, and goods. This is a three-pronged attack on consumer wallets just as the headline number makes inflation top of mind again. This sets up the second half of 2026 for brutal, incremental battles on multiple fronts. It’s a reminder that reaching 2% was never the finish line, as volatility in the U.S. CPI data has shown for other central banks.
How Does the Bank Navigate a Trap of Its Own Making?
The Bank of England’s mandate math gets messier by the day. It knows the July surge is temporary. Its own forecast for core CPI was 2.6%, and TD Securities expects it to land exactly there. Reacting with a rate hike to a known, transitory energy cap change would be policymaking by headline and would likely hurt its long-term credibility.
But doing nothing is a gamble, too. The BoE’s primary job is to manage inflation expectations. If the public sees the 2.9% headline and concludes the central bank has lost control, those expectations could become unmoored. The psychological impact could be more corrosive than the data itself. They must thread the needle between dismissing a known factor and acknowledging that the “known factor” underscores broader persistence.
This leaves them most likely on a prolonged hold, a scenario TD alludes to: "the BoE is more likely to remain on a prolonged hold at its already-restrictive level of Bank Rate, rather than elect to hike further."
What's the True Nightmare Scenario for Threadneedle Street?
Beyond the quarterly data lies the central bank’s ultimate fear: a wage-price persistence loop. Persistent services inflation at 3.4% is the kindling for that fire. If workers, seeing higher headline inflation and a still-tight labor market (albeit loosening, per TD's analysis), demand higher wages to compensate, and businesses pass those costs on in the form of even higher services prices, the BoE’s task becomes infinitely harder.
TD Securities offers a sliver of optimism here: "we see less of an obvious impact given the loosening of the labour market and reduced bargaining power of the worker." This is the crucial offsetting factor that could prevent the nightmare loop. However, it’s a passive hope, not an active policy. The Bank is banking on a softening jobs market doing its dirty work for it, a risky bet when price signals are flashing amber.
What Comes Next for Rates, the Pound, and UK Markets?
The immediate future for UK monetary policy looks less like a decisive turn and more like a tense, hawkish vigil.
Most Likely Path: Hawkish Hold
The BoE will almost certainly hold rates steady, but its communication will be tinged with renewed concern. It will need to explain away the headline jump while stressing vigilance on services and core inflation. Market pricing for cuts will be pushed further into 2025, supporting the pound but weighing on growth-sensitive UK equities.
Wildcard Scenario: The Politically Painful Hike
One more rate hike remains on the table, a last, desperate tool if services inflation refuses to budge towards the end of the year. It would be a politically explosive move but might be justified if the BoE sees wage settlements reacting to the higher inflation path.
Market Takeaway: The 'Last Mile' is a Minefield
Investors should brace for continued volatility in UK assets. The path back to a stable 2% is proving to be a brutal slog, littered with false starts and new threats. As has been the case with other major economies, the final descent in inflation is the most treacherous. This choppy environment has trapped assets from Bitcoin to gold, as macro uncertainty becomes the dominant market force. For the UK, the new steady state isn't low inflation and low rates; it’s stubborn inflation and restrictive policy for far longer than anyone hoped.
Disclaimer: This XOOMAR analysis is for informational and educational purposes only. It is not financial, investment, legal, tax, or professional advice. It does not provide buy, sell, hold, price-target, portfolio, or personalized recommendations. Verify information independently and consult qualified professionals before making decisions.
Impact Analysis
- The jump to 2.9% headline CPI could destabilize public inflation expectations the Bank of England has spent years trying to anchor.
- The mechanical energy price cap adjustment exposes how fragile the headline 2% target is, masking persistent underlying price pressures.
- Markets and policymakers must navigate the disconnect between a technical target hit and public perception that inflation is moving in the wrong direction.
Originally published on XOOMAR. For more news and analysis, visit XOOMAR.
