UK Inflation Climbs Again: Why Prices Are Rising Faster Than Expected

Overview

Consumer prices in the United Kingdom are once again outpacing expectations, rising at nearly double the Bank of England’s target rate. After a year of decline through 2024, inflation has accelerated in 2025, driven mainly by food costs, regulated price increases, and labour-related expenses. This trend marks a concerning shift for policymakers who believed price stability was within reach.

Inflation’s Recent Path

Between 2021 and 2023, inflation in the UK reached its highest levels in over four decades, peaking at almost 11 percent in late 2022. By September 2024, it had dropped sharply to 1.7 percent, appearing to settle near the Bank of England’s 2 percent goal.

However, the decline proved short-lived. In July and August 2025, the annual inflation rate stood at 3.8 percent—the highest since early 2024. Over the past five years, the cumulative impact has been striking: prices in August 2025 were 28.2 percent higher than in August 2020, compared with an 8.3 percent rise in the preceding five-year period.

This rebound illustrates how inflation’s effects build up over time. While the pace slowed briefly in 2024, the general price level remains far above pre-pandemic norms, and households continue to feel the squeeze.

The Bank of England’s Role and Target

The UK government tasks the Bank of England with keeping inflation close to 2 percent in the medium term. The Bank’s Monetary Policy Committee (MPC), independent since 1997, manages interest rates to achieve that goal.

If inflation deviates by more than one percentage point from the target—above 3 percent or below 1 percent—the Governor must write an open letter to the Chancellor explaining the reasons and setting out the Bank’s response. With inflation currently at 3.8 percent, Governor Andrew Bailey did so in September 2025, attributing much of the rise to increases in food prices and “administered prices” set or influenced by the government.

Why Inflation Picked Up Again

Policy-linked price increases

The Governor’s letter identified a few major drivers. Key among them are regulated or government-linked price increases, including higher water bills and Vehicle Excise Duty.

April 2025 also brought two notable policy changes: a rise in employer National Insurance contributions (NICs) and a 6.7 percent increase in the National Living Wage. Together, these raised labour costs across the economy. According to the Bank’s Decision Maker Panel survey, two-thirds of businesses said they absorbed the NICs rise through reduced profit margins, while about a third passed on costs to consumers by raising prices. One in five reported lowering wages relative to what they would otherwise have paid.

Energy and commodity prices

Energy bills, which had been declining, turned upward again this year, adding further pressure to production and transportation costs. In parallel, global agricultural commodity prices increased, pushing up food inflation more sharply than expected.

The Surge in Food Prices

Food and non-alcoholic drink prices rose 5.1 percent year-on-year in August 2025, up from 3.3 percent in January. Several categories saw exceptional hikes: beef and veal prices climbed 24.9 percent, butter 18.9 percent, and chocolate 15.4 percent compared with the previous year.

This increase stems partly from international markets. The UN Food and Agriculture Organization’s global food price index was up around 8 percent in August 2025 from a year earlier, reflecting higher global demand, climate disruptions, and rising input costs.

However, the Bank of England also highlights domestic factors. UK food inflation has outpaced that of the Eurozone, suggesting internal cost pressures—such as rising wages and taxes—are amplifying global trends. The Food and Drink Federation, representing manufacturers, notes that regulatory changes and higher employer NICs have made operations more expensive, leading many firms to pass on part of those costs.

Over five years, the cumulative effect is stark: UK food prices have risen 37.2 percent between August 2020 and August 2025, compared with just 4.6 percent between 2015 and 2020. Although food inflation briefly eased in 2024, it has regained momentum in 2025.

Fiscal and Economic Context

The upcoming Budget

The government has set 26 November 2025 as the date for the next Budget. With inflation still above target, the Chancellor faces a complex balancing act between adhering to fiscal rules and providing economic support. Rising prices raise government spending pressures and can complicate debt management, especially when public expectations of price stability weaken.

The House of Commons Library will issue its usual pre-Budget briefing, covering public finances, the economic outlook, and possible revisions to the Office for Budget Responsibility (OBR) forecasts. The OBR is likely to scrutinise how inflation affects both revenues (through higher nominal tax receipts) and expenditure (via indexed payments and public sector wages).

GDP growth outlook

While inflation has revived, overall growth remains modest. GDP growth in the first half of 2025 was slightly better than expected but continues to hover between 1.0 and 1.5 percent annually—a rate often described as “subdued.”

The OECD’s September 2025 forecast projects GDP growth of 1.5 percent in 2025 and 1.0 percent in 2026, signalling that the UK economy is still struggling to regain pre-pandemic dynamism. Weak productivity, soft investment, and cautious consumer spending continue to hold back momentum.

This combination of high inflation and low growth—a form of mild stagflation—poses a challenge for policymakers. Raising interest rates further could help curb inflation but risks stalling already-weak growth.

Summary of Key Points

• Inflation has rebounded to 3.8 percent in mid-2025, nearly double the Bank of England’s target.
• Cumulative price rises since 2020 total 28.2 percent, highlighting how living costs remain much higher than pre-pandemic levels.
• The Bank of England attributes the latest rise to food costs, government-linked prices, higher wages, and energy bills.
• Food inflation reached 5.1 percent in August 2025, led by steep increases in beef, butter, and chocolate prices.
• Global commodity prices and domestic wage growth both play major roles in sustaining price pressures.
• The Budget on 26 November 2025 will test the government’s ability to maintain fiscal discipline while addressing cost-of-living pressures.
• Economic growth remains tepid, with GDP expected to expand by only 1–1.5 percent in 2025.

Conclusion

The UK’s return to higher inflation in 2025 highlights how difficult it is to maintain price stability in a volatile global and domestic environment. After appearing to have inflation under control in 2024, the economy is again contending with rising costs in food, energy, and regulated sectors.

For households, this means continued pressure on living standards, especially as wage growth fails to keep pace with food and housing costs. For policymakers, it means navigating a tightrope: containing inflation without derailing fragile growth.

The months ahead—particularly the government’s November Budget and future MPC decisions—will be pivotal. Whether inflation can be brought back to the 2 percent target without deeper economic pain will depend on coordinated action, credible fiscal discipline, and global price stability.

While the worst of the post-pandemic inflation crisis may be behind the UK, 2025 has shown that the path back to normality remains uneven—and that vigilance, not complacency, must guide policy in the year ahead.