29th July 2026
Britain had just received some genuinely encouraging inflation news. Then oil prices started rising again — threatening to undo some of the progress that had taken so long to achieve.
The latest official figures showed UK inflation falling to 2.6% in June, down from 2.8% in May and the lowest rate for 15 months. It was welcome news for households, businesses and the Government after years of exceptionally high inflation.
But there is a problem.
The fall in inflation came at a time when energy prices had eased considerably following the earlier disruption surrounding the Iran conflict.
Oil has now become much more volatile again, with Brent crude briefly moving above $100 a barrel before subsequently falling back. That matters because the lower oil price that helped Britain's June inflation figure may not be available when the next inflation figures are calculated.
Why does oil matter so much to British inflation?
Oil is not just about petrol and diesel.
It affects the cost of moving goods around the country, heating and energy costs, aviation, manufacturing, agriculture and many other parts of the economy.
When fuel becomes more expensive, businesses face higher costs.
Those costs can eventually be passed on to consumers.
The effects therefore spread through the economy.
Higher diesel prices can increase the cost of delivering food.
Higher aviation fuel costs can push up air fares.
Higher transport costs can increase the price of almost anything that has to be moved.
And higher energy costs can affect businesses from small shops to major manufacturers.
The timing could hardly be worse
The June inflation figure of 2.6% was encouraging partly because it showed that inflation was moving closer to the Bank of England's 2% target.
But the Bank has already warned that the effect of higher energy prices can take time to work through the economy.
That means the June figure could eventually look like a temporary improvement.
The National Institute of Economic and Social Research now expects inflation to average 3.1% during 2026, rising to 3.8% in February 2027 before gradually falling back towards the Bank's target in early 2029.
That is a considerably less comfortable outlook than the June inflation figure alone would suggest.
What does this mean for households?
The important distinction is between the inflation rate and prices themselves.
If inflation falls from 4% to 2.6%, prices are still rising.
They are simply rising more slowly.
If inflation subsequently rises again because oil prices increase, households don't get back the purchasing power they lost during the earlier inflation surge.
They face another period of rising prices on top of the already elevated price level.
This is why another energy shock can feel much worse than the headline inflation figure suggests.
Petrol and diesel could be the first warning
The most visible effect is likely to be at the petrol station.
If crude oil remains around $100 or higher, wholesale fuel prices will face upward pressure.
There is a delay between movements in crude oil and changes in forecourt prices, so the effect isn't necessarily immediate.
But if higher oil prices persist, motorists are likely to notice.
For people and businesses in rural Scotland, where journeys are often longer and public transport alternatives more limited, this can be particularly significant.
A few pence more per litre can quickly become a substantial additional annual cost for a business operating several vehicles.
Heating costs could follow
The next concern is energy.
Britain's domestic energy prices don't automatically change every time the oil price moves.
But international energy markets are interconnected, and higher wholesale energy costs can eventually influence household bills.
That creates a particular problem heading towards winter.
If oil and gas prices remain elevated as households begin using more energy, the impact on household budgets could be much greater than it is during the summer months.
Businesses face the squeeze too
For businesses, the problem is not simply what customers pay at the pump.
Fuel is an input cost.
A haulage company pays more to operate its lorries.
A farmer pays more for machinery and transport.
A fishing business faces higher fuel costs.
A tradesperson travelling considerable distances pays more to get to customers.
A manufacturer faces higher transport and energy costs.
Those businesses then have three choices:
absorb the additional cost;
reduce their margins;
or increase prices.
None is particularly attractive.
The Bank of England faces the most difficult choice
This brings the oil price directly into the interest-rate debate.
The Bank of England is currently expected to leave Bank Rate at 3.75% at its meeting on Thursday.
But markets have become much more concerned about the possibility of a later increase if energy prices remain high.
That creates a difficult situation.
Higher oil prices push inflation upwards.
Higher interest rates are one of the tools available to the Bank to prevent inflation becoming embedded in wages and prices.
But higher interest rates also make borrowing more expensive.
That can hurt households with mortgages, businesses looking for finance and companies trying to invest.
Britain could therefore face the wrong combination
The real danger isn't simply higher inflation.
It is higher inflation combined with weak economic growth.
That is the situation economists often describe as stagflation.
Britain isn't necessarily there now.
The economy has proved more resilient than expected during the first half of 2026.
But the risk is becoming more visible.
NIESR expects UK GDP to grow by around 1.1% in 2026, while warning that a slowdown is still likely.
If oil remains high, Britain could therefore face slower growth at exactly the same time as inflation begins rising again.
The inflation victory may therefore be premature
The 2.6% inflation figure was good news.
But it should not be mistaken for the end of the inflation problem.
The UK has spent years dealing with an exceptionally large increase in the cost of living.
Even after inflation returns to 2%, prices do not return to where they were before the inflation surge.
And if energy prices rise again, the process starts adding further increases.
The next few months will therefore be crucial.
If oil prices fall back and the Middle East conflict eases, the June inflation improvement could continue.
If oil remains around $100 or moves higher, the situation could change rapidly.
The biggest danger is another energy shock
Britain's economy has already experienced the damage that can be caused by an energy shock.
Households have seen their energy bills rise.
Businesses have seen costs increase.
Interest rates have had to remain much higher than many borrowers expected.
And governments have had to spend billions trying to cushion the impact.
Another prolonged oil-price shock could therefore have consequences far beyond the petrol station.
The 2.6% inflation figure is welcome news — but it may prove to be a pause rather than the end of the inflation story.
For households, businesses and the Bank of England, the question now is whether oil prices settle back down.
If they don't, Britain's inflation victory could prove to have been much more fragile than it appeared only a few weeks ago.