Inflation has increased by more than expected reducing the chances of another interest rate cut in September.
The Consumer Prices Index (CPI) rose by 3.8% in the 12 months to July 2025 – this was up on the 3.6% in June.
It measures how much the price of goods and services have risen in the past year, so provides an indication of our spending power.
But, with the Bank of England’s (BoEs) target for inflation at 2% – today’s data shows it is heading in the wrong direction. To tame this elevation, the BoE will need to keep interest rates higher, and this will be a blow to mortgage borrowers who were holding out for more cuts.
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, said: “An uptick in inflation can be a cause for concern for consumers as it signals ever-higher prices for everyday essentials. This erodes purchasing power, especially for lower-income households, who spend a larger proportion of their income on necessities.”
She added: “Mortgaged homeowners and first-time buyers may feel disheartened by the latest inflation reading. Rising inflation can dent affordability and reduce their borrowing power, making it harder to secure a mortgage or move up the property ladder.”
And it may also have an effect on interest rates – which are currently at 4%, following a 0.25% cut earlier this month – and on the cost of our of mortgages.
David Hollingworth, associate director at L&C Mortgages, explained: “It was widely expected that the rate of inflation would increase in July but today’s figures have edged higher than anticipated. That will be a blow for those hoping for further base rate cuts and could signal that rates will remain higher for longer.”
He added: “Mortgage borrowers have been enjoying a market where rates have been dropping. Fixed rates have been pricing in the recent and future cuts, so have been edging down with a host of deals now below 4%.
“Those reductions have tended to come in small increments, but we could see that slow further or even reverse in some cases if the market reacts badly to the threat of higher inflation than was previously expected.”
He offered the following advice to those due to take out a mortgage in the coming months.
“Borrowers holding out for more cuts may want to keep close tabs on mortgage rates” Hollingworth said. “It’s far from doom and gloom but securing a rate now will protect against any turnaround but still allow a further review before completion, if there are further improvements.”
