UK inflation rose to 3.8% in July, contrary to the 3.7% increase that was anticipated. This unexpected increase supports the Bank of England’s stance to potentially pause interest rate changes in September.
Financial markets had already been anticipating a 94% likelihood of a pause, so large changes in investor behaviour are not expected. Consequently, there is limited potential for a rise in the value of the sterling, with GBP/USD holding steady at 1.3490, while major option expiries at 1.3500 are also being noted.
Services Inflation And Core Inflation
Services inflation remained at 5.2% annually in July, while core inflation increased from 4.7% in June to 5.0% in July. These figures suggest ongoing challenges for the Bank of England as they face increasing stagflation concerns.
The primary contributor to July’s strong inflation figures came from transport prices, with the Office for National Statistics noting increased airfares due to the school summer holidays. This seasonal factor resulted in higher transport costs, which greatly affected the inflation rate for July.
The inflation number for July came in slightly higher than expected at 3.8%, which is a notable re-acceleration from the 2.1% we saw back in May 2025. This hotter print does little to change our view on the Bank of England’s September decision, where a pause is almost fully priced in. This confirms the rate hiking cycle that began back in late 2021 has likely reached its peak.
For derivative traders, this caps the pound’s upside potential in the near term. The heavy concentration of option expiries around the 1.3500 level in GBP/USD will likely act as a gravitational point, limiting volatility in the coming weeks. Strategies that benefit from range-bound price action, such as selling straddles or iron condors, could be appropriate.
The Worrying Picture Of Stagflation
The underlying details present a much more worrying picture of stagflation. Core services inflation remains stubbornly high, while recent data showed UK GDP growth for the second quarter of 2025 was a meager 0.1%, reminiscent of the weakness during the technical recession of late 2023. This toxic mix of sticky inflation and near-zero growth suggests long-term weakness for sterling once the market looks past the immediate central bank decision.
We should somewhat discount the headline spike caused by transport prices, which was mainly due to seasonal airfare hikes for the summer holidays. The more critical data point remains the persistent core services inflation. This is the figure that will keep the Bank of England from considering rate cuts and will be the key driver for currency positioning into the final quarter of the year.
