Inflation has increased by more than analysts expected, as the median pay deal remains stubbornly flat, according to the latest data for July 2025.
The consumer prices index (CPI) increased to 3.8% in the year to July 2025, up from 3.6% in June, according to the Office for National Statistics.
Inflation and pay deals
Bank of England says NIC rise is dampening pay rises
The inflation measure that factors in housing costs (CPIH) also grew from 4.1% to 4.2%, while the retail prices index (RPI), the measure trade unions refer to in pay talks, increased again. RPI stood at 4.8% in July, up 0.2 percentage points from June.
The ONS stated that air fares and food were the primary contributors to the higher cost of living, with beef, chocolate, and coffee experiencing price increases of 24%, 18%, and 17%, respectively.
Meanwhile, fresh data from Brightmine, which monitors employers’ annual pay increases, showed that the median pay deal in the three months to the end of July stood at 3.0%, for the consecutive eighth month.
The median pay deal lagging behind inflation means that workers’ pay covered by Brightmine’s analysis is falling in real terms.
Growth in regular pay, excluding bonuses, in the 12 months to June 2025 stood at 5.0%, only slightly ahead of the RPI measure, according to ONS labour market data released last week.
Speaking about today’s inflation figures, Chancellor Rachel Reeves said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.”
The headline CPI rate of 3.8% – the highest rate since January 2024 – is roughly in line with the Bank of England’s forecast for 3.76%, but higher than most economists’ predictions. It is expected to peak at 4% in September before starting to fall.
Martin Sartorius, principal economist at the CBI, said: “Inflation ticked up slightly in July, broadly in line with the Bank of England’s expectations. Higher energy and regulated prices continue to put upward pressure on inflation, and the increase in labour costs following last year’s Autumn Budget are also feeding through.
“Today’s inflation data will reinforce the Monetary Policy Committee’s cautious approach to cutting interest rates going forward. While inflation is projected to ease next year, the risk of second-round effects means that the MPC will not race to loosen policy in the near term. We expect that the MPC will keep rates unchanged in September, as it waits to see how inflation and labour market data develop going into the autumn.”
Earlier this month, GDP figures showed modest economic growth of 0.3%.
Sheila Attwood, HR insights and data lead at Brightmine, said: “GDP may have risen, but the likelihood is that it won’t drive growth in pay awards. While this improvement is encouraging, employers are continuing to be cautious when it comes to pay awards, with four in five UK employees having received smaller pay awards in 2025 compared to last year. With ongoing uncertainty in the economy, it is likely that the current pattern of pay awards will continue.
“The continuation of the 3% headline pay award is a clear sign of prevailing employer pay restraint. And while the Bank of England expects ongoing increases in inflation, many employers are continuing to approach wage decisions with caution, keeping wage rises at 3%, in the face of continued economic uncertainty and the looming Autumn Budget.”
Based on a matched sample analysis, Brightmine found that most 2025 deals (78.9%) are lower than the settlement reached in 2024. This reflects the high pay awards recorded in 2024, while organisations have chosen to introduce more muted pay rises this year.
Pay freezes remain uncommon. Despite the decreasing pay award levels, pay freezes are not widespread, with just 3.1% of all 2025 deals recorded so far being a freeze in pay.
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